Background

		Definition and Objectives of Tax Expenditures

Tax expenditures are tax provisions that are exceptions to the normal  structure of individual and corporate income tax necessary to collect  federal revenue. They represent revenue losses—the amount of revenue  that the government forgoes—resulting from federal tax provisions that  grant special tax relief for certain kinds of behavior by taxpayers or for  taxpayers in special circumstances. For example, some tax expenditures  are used to provide economic relief to selected groups of taxpayers, such  as the elderly, the blind, and parents or guardians of children.  Policymakers have also long used tax expenditures as a tool to  accomplish national social and economic goals, such as encouraging  people to save for retirement, promoting home ownership or investments,  and funding certain research and development. Such goals are often  similar to those of mandatory and discretionary spending programs, and  tax expenditures may be used in combination with these types of  spending to achieve national objectives.
The Congressional Budget and Impoundment Control Act of 1974  identified six types of tax provisions that are considered tax expenditures  when they are exceptions to the normal tax structure, as described in  figure 1.
The term tax expenditure has been used in the federal budget for four  decades, and the tax expenditure concept is a tool that the federal  government uses to allocate resources and achieve national priorities. In  effect, many tax expenditures can be viewed as spending channeled  through the tax code in that the federal government “spends” some of its  revenue by forgoing taxation on some income. Many tax expenditures are  comparable to mandatory spending programs, for which spending is  determined by rules for eligibility, benefit formulas, and other  parameters. Other tax expenditures, such as the low-income housing  tax credit, resemble discretionary spending programs, for which Congress  appropriates specific funding each year. Nonetheless, deciding whether  a specific tax provision should be characterized as a tax expenditure is a  matter of judgment, and disagreements about classification stem from  different views about what should be included in the normal income tax  structure. For example, some argue that the distinction between tax  provisions labeled as tax expenditures, and provisions that are not, is  arbitrary; thus, labeling some provisions as tax expenditures implies that  all income inherently belongs to the government and could be taxed.

		Fiscal Effect of Tax Expenditures

Tax expenditures have a significant effect on overall tax rates as well as  the budget outlook. The revenue the federal government forgoes from tax  expenditures reduces the tax base and requires higher tax rates to raise  any given amount of revenue. In addition, tax expenditures, like any  federal program spending, reduce the amount of funding available for  other federal activities, increase the budget deficit, or reduce any budget  surplus. In recent fiscal years, revenue losses from tax expenditures have  been similar to discretionary spending levels (see figure 2).
Treasury’s Office of Tax Analysis and the congressional Joint Committee  on Taxation (JCT) each annually compile their own lists of tax  expenditures and estimates of their revenue losses. They estimate  revenue losses for a specific tax expenditure by comparing the revenue  raised under current law with the revenue that would have been raised if  that provision did not exist, assuming all other parts of the tax code  remain constant and taxpayer behavior is unchanged. However, tax  expenditures’ revenue loss estimates do not necessarily represent the  exact amount of revenue that would be gained if a specific tax  expenditure was repealed, since repeal of the tax expenditure could  change taxpayer behavior in some way that would affect revenue.  While, in general, the tax expenditures lists Treasury and JCT publish  annually are similar, Treasury and JCT also have different methods for  estimating tax expenditures, which can result in differing estimates.

		Federal Budgeting Processes

Federal budgeting processes provide the means for the government to  make informed decisions about priorities across competing national  needs and policies, and to allocate resources to those priorities. For the  purposes of this report, federal budgeting processes can be broken down  into three major phases: executive budget formulation, congressional  budgeting processes (during which Congress adopts its budget and  enacts laws appropriating funds for the fiscal year), and evaluation.
Executive budget formulation. Every year, the President is required to  compile and submit a budget to Congress for consideration, a process  which OMB manages with the assistance of agencies. During the  formulation of the President’s budget, discretionary spending is reviewed  in detail and funding levels are proposed for existing and new  discretionary programs. In addition, mandatory spending or new revenue  provisions may be proposed.
Congressional budgeting processes. Once Congress receives the  President’s budget request, it begins its own process to enact a budget  for the U.S. government. This process includes developing appropriations  legislation for discretionary spending; proposing authorizing legislation to  establish or continue the operation of federal programs or agencies; and  proposing revenue measures, including tax expenditures, which can be  either permanent or temporary.
Two of the major phases of federal budgeting—executive budget  formulation and congressional budgeting processes—are further  described in figure 3.
Evaluation. GPRA and subsequently GPRAMA established a  performance planning and reporting framework for the federal  government. This framework provides important tools that can help inform  congressional and executive branch decision making to address  challenges the federal government faces, including the allocation of  scarce resources across different policy tools. GPRAMA requires that  OMB and agencies establish different types of government-wide and  agency goals, including:
Cross-agency priority (CAP) goals. These are government-wide,  outcome-oriented goals—for example, improving science, technology,  engineering and math education—that cover a limited number of  policy areas, as well as goals for management improvements needed  across the government, such as delivering world-class customer  service. OMB develops these goals in coordination with agencies.
Strategic objectives. These are long-term agency goals that reflect the  outcome or management impact an agency is trying to achieve, and  express the results or direction the agency will work toward. To  illustrate, one of the strategic objectives identified in HUD’s 2014-2018  strategic plan is to ensure sustainable investments in affordable rental  housing.
Agency priority goals (APG). These are near-term goals to reflect  agencies’ highest priorities and represent an achievement that agency  leaders want to accomplish within 2 years through focused leadership  attention. They are to have clear completion dates, targets, and  indicators that can be measured or marked by a milestone to gauge  process. GPRAMA requires that agencies identify how their  respective APGs contribute to their long-term strategic goals. To  illustrate, one of HUD’s APGs is to preserve and expand affordable  rental housing to serve around 135,000 more households in fiscal  years 2016 and 2017 than the baseline 5.5 million households already  served.
Under GPRAMA, OMB is to develop a federal government performance  plan that sets the level of performance needed to achieve the CAP goals.  In doing so, OMB is to identify the organizations, programs, and  activities—including tax expenditures—that contribute to those goals. In  addition, OMB is to periodically review and report on progress toward  these goals. As part of these reviews, OMB is to assess whether the  programs and activities—including tax expenditures—are contributing to  the goals as planned. We have previously reported on OMB’s  implementation of these requirements. OMB has tasked agencies with  responsibility for identifying applicable tax expenditures for reporting  progress on agencies’ priority goals and strategic objectives in GPRAMA  guidance.

	Federal Budget Processes Include Fewer Budgetary Controls, Fewer Reviews, and Less Information for Tax Expenditures Than Other Types of Spending

		OMB and Agencies Conduct Fewer Reviews and Provide Less Information on Tax Expenditures Than Other Spending in Formulating the President’s Budget

While tax expenditures are included in the development of the President’s  Budget, they are subject to fewer reviews, and less information is  required to be provided on them. See figure 4 for a summary of key steps  and how tax expenditures compare to spending in the executive budget  formulation process.
Tax expenditures and spending are treated differently in the first key step  of the executive budget formulation process, where agencies prepare  budget proposals to submit to OMB.
OMB Circular No. A-11 requires that agencies provide written  justifications for all discretionary and mandatory spending programs and  activities of an agency, but does not require such written justification for  existing tax expenditures. Further, under OMB Circular No. A-11,  agencies are directed to submit less detailed information to justify new or  modified tax expenditures than when they propose new spending  programs to OMB. For example, OMB Circular No. A-11 directs agencies  to provide, among other things, an analysis of financial and personnel  resources required to enact a program, a comparison of total program  benefits and costs, and supporting information from outside evaluation  and analyses for spending programs. In contrast, for tax expenditure  proposals, agencies are not directed to provide such detailed analyses in  their written justifications. Instead, they are directed to generally justify  why a tax expenditure is needed and why it is preferable to a spending  program.

			OMB Review of Budget Proposals

After agencies submit their budget proposals, OMB and the President  review them and decide what proposals and programs will be submitted  to Congress. Because agencies are not directed to include a written  justification of existing tax expenditures in their budget proposals, such  information is not included in this step.
OMB staff told us that tax expenditures are one of several policy tools  considered when discussing new legislative proposals for the President’s  budget. Treasury officials reported that an extensive process is conducted  with OMB annually to develop the President’s revenue proposals,  including tax expenditures, with a particular focus on expiring provisions.  We asked OMB staff the extent to which tax expenditures are included in  its budget-related discussions with Treasury officials, but staff declined to  respond, stating that such information was predecisional.

			Approval and Submission of the President’s Budget

OMB then prepares the President’s budget, which presents aggregate  spending and revenue levels and contains the President’s spending and  revenue proposals. The President then approves the budget and submits  it to Congress. Although tax expenditures contribute to budget functions,  the tax expenditure estimates are not presented alongside summaries of  other spending levels by functional category in the budget. Instead, tax  expenditure revenue loss estimates are presented separately from other  types of spending in the budget’s Analytical Perspectives. We have  reported in the past that this presentation makes their relative  contributions toward achieving national priorities less visible than  spending programs.
Tax expenditure proposals, which include both new tax expenditures and  amendments to existing tax expenditures, are included in a separate  chapter alongside other revenue proposals, though the budget does not  identify which proposals are tax expenditures. The budget includes a  short description of the proposal, along with a revenue estimate of each  particular proposal. Descriptions of discretionary and mandatory spending  and the President’s requests for those funds are also included in the  budget Appendix, along with the outlays from refundable tax credits.

			Agency Budget Justifications

Agencies also submit agency budget justifications and revenue  proposals, including tax expenditure extensions or proposals, to  Congress. Treasury submits the “General Explanations of the  Administration’s Revenue Proposals” report to Congress, and the  information required for those proposals is different than the information  provided on spending programs in their congressional budget  justifications. For all revenue proposals, including tax expenditures, the  report generally provides a description of the current law related to each  proposal, the reason the administration is proposing that law be changed,  and a description of the proposal. It also includes a table of revenue  estimates for each proposal, which is also included in the President’s  Budget. Agency congressional budget justifications also provide  information on their programs. While the form and content of budget  justifications may vary by agency and appropriations subcommittee, these  justifications may contain specific outputs of the spending program,  agency performance measures that the spending supports, and the  number of people taking advantage of a particular program.

		Similar to Mandatory Spending, the Congressional Budget Process Does Not Require Annual Reapproval or Review of Non-expiring Tax Expenditures

As part of the congressional budget process, tax expenditures are treated  similarly to mandatory spending in that expiring tax expenditures being  considered for extension and new proposals are subject to standard  congressional controls for new legislation; but existing, non-expiring tax  expenditures are not subject to annual congressional budget processes.  In addition, while discretionary and mandatory spending are included in  the Concurrent Resolution on the Budget (budget resolution), existing tax  expenditures are not explicitly included, though the budget resolution may  propose changes to tax expenditures or mandatory spending at  Congress’s discretion. See figure 5 for a summary of key steps and how  tax expenditures compare to spending in the congressional budget  process.
As part of the annual budget process, House and Senate Budget  committees develop a budget resolution, which sets budget authority in  aggregate and by functional category, as well as target aggregate  revenues. Unlike with mandatory and discretionary spending, tax  expenditures’ fiscal effects are not explicitly included in the budget  resolution. Rather, the aggregate revenue targets takes into account that  revenue will be forgone because of tax expenditures. Through  reconciliation instructions, the resolution may direct committees to  propose legislation to meet the spending and revenue targets set by the  budget resolution. The resolution is not required to propose adjustments  to tax expenditures or mandatory spending through these instructions to  meet those targets, though it may do so. The proposal is voted on by both  budget committees and the full House and Senate. As a plan for  Congress, the resolution is not presented to the President for signature  and does not have the force of law, but guides the work of the  appropriations, authorizing, and tax-writing committees, whose legislation  is evaluated against the resolution’s targets.

			Appropriations Committees

After a budget resolution is passed, appropriations subcommittees in the  House and Senate review the budget requests from their related  executive agencies and develop appropriations acts that provide  agencies the legal authority to incur obligations to fund discretionary  spending programs. Appropriations acts do not apply to tax expenditures  or, generally, to mandatory spending, and are considered by Congress on  an annual basis.

			Authorizing Committees

Separate from the annual appropriations process, the House and Senate  authorizing committees develop authorizing legislation that establishes  and continues the operation of federal programs or agencies. Authorizing  committees have jurisdiction over specific policy areas, and both  discretionary and mandatory spending programs must be authorized. For  mandatory spending programs, authorizing legislation can define program  eligibility and set benefit or payment rules, which then are paid  automatically without the need for an annual appropriation.

			Tax-writing Committees

Also separate from the annual appropriations process, tax-writing  committee legislation includes tax expenditure extensions and proposals.  Revenue legislation may establish a tax expenditure indefinitely or for  specific periods. Tax expenditures are not required to be reapproved  unless they are set to expire, though changes may be proposed in any  year.
Currently, there are budget controls both in statute and in congressional  rules that apply to spending and tax expenditure legislation. Pay-as-you- go (PAYGO) rules generally require that any law that would increase  mandatory spending or decrease revenues make an additional change in  spending or revenues so that the new law does not increase the deficit.  For example, the Statutory PAYGO Act of 2010 requires OMB to record  the budget effects of all of the revenue and direct spending legislation on  scorecards to project budgetary effects of the legislation over 5- and 10- year periods. Sometimes this control is exempted by law, as was done  in the Protecting Americans from Tax Hikes Act of 2015, which made  various tax expenditures permanent. Both the House and the Senate  have PAYGO rules. While the House’s PAYGO rule addresses only direct  spending, the Senate PAYGO rule prohibits consideration of direct  spending or revenue legislation that could increase the deficit in current  and future years.

	OMB and Agencies Have Made Limited Progress Identifying Tax Expenditures’ Contributions to Agency Goals

OMB Circular No. A-11 directs agencies to identify tax expenditures, as  appropriate, among the various federal programs and activities that  contribute to their agency goals, specifically strategic objectives and  agency priority goals (APG). Agencies are also required to review  progress toward their goals. For strategic objectives, reviews are to occur  annually in order to inform annual planning and budget formulation,  among other things. For APGs, agency leaders are required to review  APG progress in quarterly, data-driven performance reviews. In its  guidance, OMB states that tax expenditures should be subject to the  same level of review as spending programs, and often complement or  substitute for agencies’ spending programs that contribute to their  strategic objectives. OMB also directs agencies to work with Treasury’s  Office of Tax Analysis (OTA) to develop data and methods to evaluate the  effects of tax expenditures that affect, or are directed toward, the same  goals as agency programs.
Our review of agencies’ performance planning and reporting documents  found that most agencies did not identify tax expenditures as contributors  to agency goals, consistent with what we have reported previously. We  found that 7 of the 24 CFO Act agencies identified tax expenditures as  contributors to their missions (two instances) or to specific goals (five  instances). The tax expenditures these seven agencies identified  accounted for 11 of the 169 tax expenditures included in the President’s  Budget for Fiscal Year 2017, representing an estimated $31.9 billion of  $1.23 trillion in forgone revenues for fiscal year 2015. In addition, three  of these seven agencies developed performance measures to gauge the  contributions of tax expenditures towards progress on agency goals. See  figure 6 for a summary of the tax expenditures identified as contributing to  agency goals or missions.
One commonality among agencies that linked tax expenditures to  performance measures is that many of these agencies have a defined  role in administering the related tax expenditures, and therefore collect  data on the tax expenditures. See table 1 for a summary of the agencies  that identified tax expenditures contributing to agency missions and goals  in their performance documents as of January 2016.

		A Lack of Clarity about Agencies’ Roles Leads to Inaction in Identifying Tax Expenditures That Contribute to Agency Goals

As we have previously reported, one key impediment to including tax  expenditures in agency performance reviews is the continuing lack of  clarity about the roles of different federal agencies in conducting reviews  of tax expenditures. This lack of clarity can lead to inaction in identifying  tax expenditures’ contributions to agency goals.
Office of Tax Analysis (OTA). Treasury’s OTA provides economic  and policy analyses leading to development of the President’s tax  proposals. It also assesses major congressional tax proposals, which  can include tax expenditures. OTA prepares Treasury’s revenue and  revenue loss estimates for tax proposals and tax expenditures,  respectively. According to OTA officials, OTA does not conduct  systematic reviews of tax expenditures, but may conduct them when  policymakers are considering changes to tax policy.
Internal Revenue Service (IRS). As Treasury’s bureau responsible  for determining, assessing, and collecting taxes, IRS administers and  supervises the execution and application of internal revenue laws or  related statutes, including for tax expenditures. However, IRS is not  responsible for managing federal housing, energy, or any of the many  other policies to which tax expenditures may contribute. At times, this  can lead to insufficient oversight of tax expenditures. For example, in  July 2015, we reported that IRS conducted minimal oversight of state  housing finance agencies (HFA), on which IRS relies to administer  and oversee the low-income housing tax credit. We found that IRS  conducted minimal oversight in part because the tax credit is a  peripheral program for IRS, in terms of its compliance responsibilities,  mission, and priorities for resources and staffing. As part of that  report, we suggested Congress consider designating HUD as a joint  administrator of the program, including responsibilities for HFA  oversight.
Other agencies. If agencies do not have a defined role in  administering a tax expenditure, they may choose not to identify the  tax expenditure’s contributions to agency goals. At the three agencies  we selected to interview—USDA, DOE, and HUD—officials reported  that they sometimes do not include tax expenditures as contributors to  goals in their performance processes or reporting, because the  agencies do not have a defined role in administering the tax  expenditures. For example, in HUD’s fiscal year 2016 Performance  Plan and fiscal year 2014 Performance Report, the agency describes  a strategic objective involving “green and healthy homes.” Though  HUD does not identify related tax expenditures, agency officials told  us they understood that many homeowners and residential property  owners who undertake energy efficiency retrofits or install solar  panels take advantage of, or benefit from, energy-related tax credits,  particularly for solar investment. Agency officials explained that HUD  publishes resources on its web portal on renewable energy to help  owners walk through the steps of financing options, some of which  include tax credits. Officials at all three agencies we spoke to said that  their performance conversations focused on programs they  administer, which was why tax expenditures were not always  included.
OMB staff told us they give agencies flexibility to determine the  appropriate programs and tax expenditures that should be identified as  contributors to agency goals. They also said that it is the agencies’  responsibility to incorporate tax expenditures, as appropriate, in their  progress updates for agency goals, and that they do not provide any  further clarity on agencies’ roles. Further, OMB staff told us that they do  not track agencies’ identification of tax expenditures that contribute to  agency goals. As a consequence, OMB does not have a process in place  to determine the extent to which agencies are capturing the contributions  of all federal commitments, including tax expenditures, toward agency  goals.
Given OMB’s government-wide purview and Treasury’s familiarity with  administering the tax code, these agencies are well positioned to assist  other agencies in identifying tax expenditures that contribute to their  goals. To assist agencies, OMB’s 2013 and 2014 Circular No. A-11  guidance noted that OMB would work with Treasury and agencies to  identify where tax expenditures align with their goals, and that this  information was to be published on Performance.gov and included in  relevant agency plans, beginning in February 2014. However, OMB  subsequently removed the language about working with Treasury and  agencies to align tax expenditures with agency goals in the June 2015  update to its guidance. OMB staff told us they removed the language  because the agency had no immediate plans for focusing on this effort,  nor did they have the capacity to consider it, despite seeing the benefit of  such an effort. Without additional OMB and Treasury assistance,  agencies may continue to have difficulty identifying whether, or which, tax  expenditures contribute to their goals.

		OMB Has Not Addressed Long-Standing Performance Measurement Challenges That Affect Agencies’ Ability to Evaluate How Tax Expenditures Contribute to Agency Goals

We have reported previously that challenges with performance  measurement limit agencies’ ability to identify the contributions of tax  expenditures to agency goals, and our work found that those challenges  for agencies continue to exist.
In September 2005, we found that a lack of performance information  was a challenge in assessing the performance of tax expenditures.  We recommended that OMB, in consultation with Treasury, identify  ways to address the lack of credible tax expenditure performance  information. The President’s fiscal year 2012 budget stated that the  administration planned to focus on addressing some of these data- availability challenges and analytical constraints so it can work toward  crosscutting analyses that examine tax expenditures alongside related  spending programs; however, as of February 2016, OMB had not  provided an update on these efforts.
In June 2013, we found that agencies face difficulties in measuring  performance across various program types, including tax  expenditures. We recommended that OMB work with the  Performance Improvement Council (PIC) to develop a detailed  approach to examine difficulties agencies face in measuring the  performance of these various types of federal programs and activities,  including identifying and sharing any promising practices from  agencies that have overcome difficulties in measuring the  performance of these program types. While OMB and PIC officials  reported that they have taken some steps to address this  recommendation in a few areas, as of June 2016, they have not yet  developed a comprehensive and detailed approach to address these  issues as envisioned in our report, and these efforts have not included  tax expenditures.
We continue to believe that implementing these recommendations would  help agencies evaluate how tax expenditures contribute to agency goals.
One factor that continues to impede agencies’ abilities to assess the  contributions of tax expenditures to their goals is the limited availability of  tax expenditure data.
Officials from Treasury and the three agencies—USDA, DOE, and  HUD—that we selected to interview told us that limited tax data can  be a barrier to conducting performance reviews or analyzing tax  expenditures.
We reported in April 2013 that tax forms did not capture who claimed  a tax expenditure and how much they claimed for 63 percent of tax  expenditures in 2011. Likewise, we have reported that tax  expenditure data that are collected on tax forms are not always  sufficiently detailed to assess or describe tax expenditure results. For  example, in April 2015, we found that IRS data did not include key  project-level information on the Investment Tax Credit and Production  Tax Credit, which is necessary to describe how many projects these  credits supported and to evaluate the credits’ effectiveness.
We reported in April 2013 that these data challenges can be remedied to  some extent by data from other agencies or other sources, such as public  records, state agency records, and surveys. However, these solutions  do not completely overcome the data challenges associated with  evaluating tax expenditures. For example, we reported that HUD  community level data can be used to partially remedy limited IRS tax data  on Empowerment Zone (EZ) employment tax credits, which did not  identify which specific communities received EZ tax credits. However,  HUD only tracks a portion of EZ employment tax credits, and thus its data  do not completely mitigate the limitations of tax form data in identifying  which communities benefit from EZ tax credits.
For some tax expenditures, evaluating performance may require  collecting additional tax form data. For example, in April 2015, we  reported that because basic information on the Investment Tax Credit and  Production Tax Credit is unavailable, it will be difficult for Congress to  evaluate the effectiveness of these tax credits or compare them with  spending or loan programs as it considers reauthorizing or extending  them. We suggested that Congress consider directing IRS to collect  additional tax form data to help evaluate the effectiveness of the credits.

	Options to Further Incorporate Tax Expenditures into Federal Budgeting Processes Have Various Potential Benefits and Challenges

Further incorporating tax expenditures into federal budgeting processes  could help achieve various broad benefits, based on our assessment of  the roundtable discussion we held with budget and tax experts and on our  prior work (see figure 7).
Below we discuss options that may help achieve these broad benefits.  We identified the options based on insights from experts during our  roundtable discussion and interviews—as well as related literature—and  our prior work. For each option, we indicate the broad benefit— additional transparency, opportunity for review, or greater control—that  could be achieved, and issues that policymakers would need to consider  when evaluating the merits of each option (which we present below as  design considerations). We do not assess the relative feasibility of these  options, nor do we recommend implementing any of these options in this  report. Finally, these options are not exhaustive, nor are they mutually  exclusive, as some options could be implemented together and may even  complement each other.
While these options offer a range of potential benefits, there are  challenges and tradeoffs for policymakers to consider in whether or how  to implement any policy to further incorporate tax expenditures into  federal budgeting processes. For example, agency officials and experts  said that implementing these options—in particular those requiring  additional information on, or reviews of, tax expenditures—would require  resources. Moreover, as previously mentioned, and as experts told us,  there is not always a consensus on which tax provisions constitute tax  expenditures. Finally, it is difficult to measure the size of some tax  expenditures that are only loosely linked to actual tax filing data. While  the JCT and Treasury use modeling to estimate tax expenditure revenue  losses, in some cases little data are available and assumptions are made.  These broad challenges would need to be considered when assessing  how to approach the different options for further incorporating tax  expenditures into federal budgeting processes.
Tax expenditures could be presented, for informational purposes, in the  congressional budget resolution alongside other spending by budget  function. A similar presentation could be included in the President’s  Budget. Currently, tax expenditure estimates are presented in  congressional budget documents and the President’s Budget separate  from other types of spending. Moreover, they are not included within, or  shown alongside, summaries of spending levels by functional category;  rather, they are an undifferentiated component of total federal revenues,  which obscures their size.
OMB previously presented tax expenditure revenue loss totals alongside  outlays and credit activity for each budget function in the federal budget  from fiscal year 1998 through fiscal year 2002, in response to one of our  prior recommendations. However, it discontinued the practice in fiscal  year 2003. In 2005, when we recommended that OMB resume presenting  tax expenditures in the budget together with related spending programs,  OMB told us that the current presentation of tax expenditure  information—that is, presenting tax expenditures separately from other  spending in the budget—was sufficient for providing the public and  policymakers with what is useful to know about these provisions of the tax  code. In our roundtable, experts noted that tax expenditure estimates by  functional category were already included in budget documents, but also  acknowledged that having the information in different parts of budget  documents does not facilitate a side-by-side comparison. As we have  previously reported, presenting tax expenditure estimates alongside  discretionary and mandatory spending levels could increase transparency  and better communicate to the public the levels of spending being  allocated to national priorities.

		Design Consideration

What methodology would Treasury and JCT use to estimate  aggregated tax expenditures by budget function? Tax expenditure  estimates represent the revenue losses associated with particular tax  provisions, assuming the rest of the tax code and taxpayer behavior  remain unchanged. If all tax expenditures within a budget function  were removed at once, there would be interactions among the tax  expenditures that would change the estimates. As a result,  aggregating current tax expenditure estimates for a budget function  would likely result in an imprecise estimate. However, Treasury and  JCT officials told us that it was methodologically feasible to prepare  aggregated revenue loss estimates representing those tax  expenditures related to a specific budget function that would account  for these interactions.
This option would institute a systematic approach to evaluating tax  expenditures on an ongoing basis. Evaluations are studies that use  research methods to address specific questions about program  performance. In particular, evaluations can be designed to isolate the  causal impacts of programs from other external economic or  environmental conditions to assess a program’s effectiveness. Treasury  does not regularly conduct evaluations of tax expenditures; rather, it  conducts some evaluations on an ad hoc basis. Other researchers and  organizations may also conduct evaluations of tax expenditures on an ad  hoc basis. OMB has previously encouraged agencies to strengthen their  program evaluations and expand their use of evidence and evaluation in  budget, management and policy decisions to improve government  effectiveness.
In 2005, we reported that the results of tax expenditure evaluations could  help identify how well tax expenditures are working, both to identify ways  to better manage specific tax expenditures and to decide how best to  ensure prudent stewardship of taxpayers’ resources. As previously  discussed, we recommended that OMB develop and implement a  framework for conducting performance reviews of tax expenditures, but  OMB has not reported on progress made on this recommendation since  the President’s fiscal year 2012 budget. Moreover, since fiscal year  2011, the President’s budget has recognized that a comprehensive  evaluation framework that examines incentives, direct results, and  spillover effects would benefit the budgetary process by informing  decisions on tax expenditure policy. Finally, this option may improve the  information available to policymakers on the effectiveness of specific tax  expenditures, which policymakers could then use in deciding how to best  allocate resources to achieve national priorities. Tax expenditure  evaluations could also complement ongoing GPRAMA-related  performance measurement and reporting by measuring results that are  too difficult or expensive to assess annually, explaining the reasons why  performance goals were not met, or assessing whether one approach is  more effective than another.

		Design Considerations

Which tax expenditures would be evaluated and how frequently?
We have previously identified options for selecting tax expenditures  for evaluation, including: (1) selecting on a judgmental basis, (2)  selecting based on established criteria, and (3) evaluating an existing  temporary tax expenditure before it is extended. Some state and  foreign governments conduct tax expenditure evaluations grouped by  policy focus or industry, or focus evaluations on tax expenditures with  the largest revenue losses. For example, Germany focuses on its  largest tax expenditures, with one budget-related document reporting  that 27 of 102 tax expenditures—accounting for 75 percent of the  value of all tax expenditures—were evaluated between 2011 and  2014. Meanwhile, the Netherlands established a 5-year schedule to  review all tax expenditures and makes the goals and standards of the  reviews publicly available.
Who would be responsible for conducting the evaluations?
Executive branch agencies could conduct these evaluations within the  GPRAMA framework. We have previously recommended that OMB  develop and implement a framework for conducting performance  reviews of tax expenditures, though OMB has not reported on  progress made on this recommendation since the President’s fiscal  year 2012 budget, as previously mentioned. Experts also suggested  that Treasury would be well equipped to analyze available taxpayer  data related to specific tax expenditures. However, they also noted  the potential for political influence in having any executive branch  agency conduct the evaluations, and that hiring nongovernmental  organizations to conduct these evaluations could be an alternative to  executive branch reviews. One expert suggested that a tax  expenditure commission with appointees from a balance of political  parties could identify which of these organizations would conduct  each review.
How might policymakers address data challenges? Agencies may  not have access to confidential taxpayer data that they might need to  conduct evaluations, and existing IRS data may not be sufficient for  evaluating the efficiency, equity, and other effects of specific tax  expenditures. For these challenges with lack of access to data,  Congress has allowed some exceptions to laws limiting the disclosure  of taxpayer information to third parties. For the challenge of lack of  tax expenditure data, any party conducting an evaluation could, to  some extent, use data from other agencies or other sources, such as  public records, state agency records, and surveys, as previously  discussed. IRS could also be directed to collect more data that could  be used to evaluate a given tax expenditure, although such an effort  could increase taxpayer burden. Policymakers could also weigh the  availability of data on specific tax expenditures when deciding which  tax expenditures should or should not be evaluated.
OMB could conduct reviews of portfolios of programs and other policy  instruments—including tax expenditures—used to help pursue similar  objectives. Currently, OMB generally reviews spending by agency rather  than by policy area. We have previously reported that while the evaluation  of spending programs in isolation may be revealing, it is often critical to  understand how federal spending programs fit within a broader portfolio of  tools and strategies—such as regulations, direct loans, and tax  expenditures—to advance federal missions and achieve federal  performance goals.
Likewise, such an analysis could help Congress and executive agencies  identify whether a program complements and supports other related  programs, whether it is duplicative or redundant, or whether it actually  works at cross-purposes to other initiatives. For example, we previously  reported that 20 federal government entities administered 160 programs,  tax expenditures, and other tools that supported homeownership and  rental housing in fiscal year 2010. We have also previously reported that  coordinated reviews of tax expenditures with related spending programs  could help policymakers reduce overlap and inconsistencies and direct  scarce resources to the most effective or least costly methods to deliver  federal support. Experts identified federal aid for higher education as  another example of an area for which portfolio review could be valuable,  as there are multiple federal grants, loans, and tax expenditures that  serve this policy area.

		Design Considerations

How would policy areas be selected for review? One expert noted  that the selection of policy areas for review could be accomplished in  Congress, either by the leadership in consultation with the President  or by a budget committee as a part of the congressional budget  process. Alternatively, GPRAMA could serve as the framework for  selecting areas for review, specifically through CAP goals—the long- term, outcome-oriented crosscutting priority goals for the federal  government. In September 2015, OMB staff told us that OMB had  determined that there were no tax expenditures that were critical to  support achievement of current CAP goals. However, as new CAP  goals are established, tax expenditures may support their  achievement. Further, we have previously reported that OMB and  agencies are required to consult with Congress when establishing or  adjusting CAP goals, which could provide Congress with opportunities  to encourage further incorporation of tax expenditures into the goals, if  desired.
How would the federal resources that contribute to a policy area  be identified? As we have reported previously, creating a  comprehensive list of federal programs along with related funding  information is critical for identifying potential duplication, overlap, or  fragmentation among federal programs or activities. GPRAMA  requires OMB to publish a list of all federal programs on a central  government-wide website. In October 2014, we reported that although  OMB and agencies have taken some initial steps to develop program  inventories with related budget and performance information, the  ensuing result has not produced a useful tool for decision making.  We made various recommendations to OMB to better present a more  coherent picture of all federal programs and ensure that the  information agencies provide in their inventories is useful to federal  decision makers. For example, one of our recommendations was that  OMB, in coordination with Treasury, develop a tax expenditure  inventory that identifies each tax expenditure and describes its  definition, purpose, and related performance and budget information;  as of November 2015, no action had been taken on that  recommendation. Such information could help agencies identify the  contributions of tax expenditures to achieving national priorities.
Policymakers could help ensure greater coordination between the tax- writing and authorizing committees by having authorizing committees  consider new or modified tax expenditure legislation for which they have  program-related expertise. When proposed legislation is introduced in the  House or Senate, it is generally referred to the committee with subject- matter expertise—thus, in the case of tax expenditures, tax-writing  committees are referred proposed tax legislation that can span national  priorities across the government. Authorizing committees, on the other  hand, are referred proposed legislation for policy areas within their  jurisdiction, but generally do not provide direct and formal input on  legislation of related tax provisions in those policy areas.
By being involved in developing or modifying tax expenditure legislation,  authorizing committees would have a broader picture of federal resources  being allocated to national priorities. This may further help policymakers  identify potential duplication between spending programs and tax  expenditures, and may allow for greater comparison of how well specific  policy tools help achieve a national priority. While bringing other  committees into the process of reviewing tax expenditures could be  institutionally cumbersome, having tax-writing and authorizing committees  review tax legislation may still be appropriate when a provision has both  programmatic purposes, like stimulating an activity, and tax policy  purposes, like taking into account taxpayers’ ability to pay taxes.

		Design Consideration

What path through committees would new tax legislation take?
Proponents of this option suggested various ways that both tax-writing  and authorizing committees could provide input when considering  proposed tax legislation. For example, some proponents suggested  that tax-writing committees could continue to draft new tax legislation,  but that authorizing committees would then need to approve the  legislation before it goes to the full House or Senate for a vote—a  process similar to the sequential referral. Under this option,  policymakers would also need to consider how to account for tax  expenditures serving varied purposes that fall within the jurisdiction of  multiple committees.
Congress could authorize the Senate and House Budget Committees to  include tax expenditures with other spending, both in total and by  functional category, in budget resolution levels. Currently, the budget  committees—via the budget resolution—set forth revenue and spending  targets, including spending targets for each major functional category of  the budget. Tax-writing committees then decide how to achieve revenue  targets through, if needed, changes to overall tax rates or to specific tax  expenditures. Meanwhile, appropriations and authorizing committees  decide how to achieve spending targets for discretionary and mandatory  spending, respectively. Depending on how it was designed, this option  would either result in the budget committees setting targets for tax  expenditure levels, or it would give authorizing (and potentially  appropriating) committees greater or full control over determining the  appropriate levels of spending for tax expenditures and other programs  within a specific budget function.
Broadly speaking, some experts said that options that further integrate tax  expenditures into congressional budgetary controls, such as the budget  resolution, could result in the greatest change in how Congress  approaches decisions on federal investments. Depending on how  policymakers designed this option, it could potentially allow for this  movement of federal resources across policy instruments. Moreover,  some experts noted it was important for policymakers to have increased  flexibility to budget across policy instruments—moving resources toward  the most efficient and effective means of making progress toward a  national priority.

		Design Considerations

How would tax expenditure estimates be allocated to  committee(s)? From our expert interviews and roundtable  discussion, and within the literature we reviewed, experts identified  various ways to further integrate tax expenditures into the budget  resolution, each of which would result in a different shift in committee  powers. For example, tax expenditures could be (1) allocated to the  tax-writing committees; (2) allocated to, or shared between, both the  tax-writing and relevant authorizing (and potentially appropriating)  committees; or (3) allocated to the relevant authorizing (and  potentially appropriating) committee to determine how to achieve  those spending levels across multiple policy instruments. The first  design alternative would continue to leverage the expertise of tax- writing committees in deciding tax policy. While the third design  alternative would likely be complex to design and implement, it would  potentially allow for the movement of federal resources across policy  instruments. The second design alternative may help achieve both  those benefits, but would also be complex to design and implement.
How might this change affect committee powers? This option  could result in a substantial change in congressional committee  jurisdictional powers, depending on how it was designed. The budget  committees, and potentially authorizing and appropriations  committees, would have greater input into tax policy decisions than  previously, while tax-writing committees would have less input. One  expert noted that dispersing tax expenditure decisions across multiple  committees could impede any opportunity for fundamental tax reform,  since the powers to make such changes would be distributed among  more congressional actors. Whether or not this change in committee  powers is an optimal outcome is a policy decision.
Could policymakers overcome tax expenditure measurement  challenges? Policymakers would need to overcome the challenges of  treating tax expenditures on the same footing as spending  programs—particularly with respect to budget controls that are  enforced. Specifically, some tax expenditure estimates are only  loosely linked to actual tax filing data. Thus, any prior-year levels of  spending for these tax expenditures are only estimates. In contrast,  spending programs are measured in obligations and outlays, which  are generally measured by the specific amounts of cash committed  and disbursed by the government, respectively. However, this  measurement challenge is not unique to tax expenditures. For  example, experts noted that credit programs are also difficult to  measure, but policymakers have made progress in measuring the  costs of these types of programs through increased scrutiny and  requirements for agencies.
Policymakers could require that all, or some subset of, tax expenditures  expire after a finite period. This option would result in Congress  periodically considering whether to allow tax expenditures to expire or to  extend them, similar to the subset of tax expenditures that currently  expire unless extended. Most other tax expenditures are enacted  permanently and continue without change unless amended. Under Pay- As-You-Go (PAYGO) rules, this option would result in the tax-writing  committees needing to find revenues to offset the cost of extending  expiring tax expenditures. However, Congress could incorporate the  cost of extending expiring tax expenditures in its baseline revenue  estimates, thus negating the need to find offsetting revenues, or it could  waive the PAYGO rules on a case-by-case basis. This option could  result in greater oversight of tax expenditures, as policymakers would be  required to explicitly decide whether or not to extend more or all tax  expenditures.

		Design Considerations

Which tax expenditures should expire, when, and in what way?
Congress could develop a general rule establishing which tax  expenditures should expire and how often. It could also consider the  added legislative workload imposed on the tax-writing committees by  such a policy when deciding when tax expenditures might expire, and  which ones would expire. We have previously reported that frequent  changes in the tax code, such as from extended or expired tax  provisions, can create uncertainty and contribute to compliance  burden by making tax planning more difficult. Policymakers could  consider if policies should be developed to mitigate this effect. For  example, grandfathering could be provided for assets purchased  under tax-preferred regimes. Policymakers could also examine how  other countries that require tax expenditures to periodically expire  have designed these policies to minimize this burden.
Could or should the option be designed to be revenue neutral?
All else equal, if a tax expenditure expires, the result would be  additional revenue that the federal government would collect.  Policymakers could consider whether to design this option in a way  that would automatically lower tax revenues to achieve revenue  neutrality.

	Conclusions

In recent years, revenue losses from tax expenditures have reached  levels similar to discretionary spending; approximately $1.23 trillion in  revenue was forgone for fiscal year 2015. Even as discretionary spending  has decreased, in real terms, since 2010, the amount of revenue forgone  via tax expenditures has increased. Yet tax expenditures do not receive  the same level of scrutiny within federal budget processes as  discretionary spending. Moreover, the executive branch has made little  progress toward increasing transparency of the budgetary effects of tax  expenditures—compared to related spending—or toward implementing a  framework to gauge their performance, as we have recommended  previously. We continue to believe in the merit of those  recommendations.
GPRAMA provides an existing framework for the executive branch to  exercise greater oversight over tax expenditures and could help facilitate  further incorporating tax expenditures into performance and budget  discussions. In implementing GPRAMA, OMB has directed agencies to  take tax expenditures into account when identifying programs and  activities that contribute to their goals. However, despite this guidance,  agencies have identified few tax expenditures that contribute to such  goals. We have found that a lack of clarity about the roles of different  agencies in conducting reviews of tax expenditures impedes their ability  to identify tax expenditures that contribute to agency goals. OMB—given  its government-wide purview—and Treasury—given its familiarity with  administering the tax code—are well positioned to assist agencies in  identifying tax expenditures that relate to their goals. Without additional  OMB and Treasury assistance, agencies may continue to have difficulty  identifying whether or which tax expenditures are relevant to their goals,  and may be limited in their understanding of how the range of federal  investments and policy tools contribute to agency goals.
More broadly, we identified various other options to further integrate tax  expenditures into both the executive and congressional budgeting  processes based on our review of literature and our past work, and our  interviews and roundtable discussion with experts. If implemented, these  options could increase transparency on how the federal government  allocates resources, provide additional means for policymakers to review  tax expenditures’ effectiveness, and create additional controls over  spending through the tax code. However, the options come with a range  of challenges and tradeoffs that policymakers would need to consider.

	Recommendation for Executive Action

To help ensure that the contributions of tax expenditures toward the  achievement of agency goals are identified and measured, the Director of  OMB, in collaboration with the Secretary of the Treasury, should work  with agencies to identify which tax expenditures contribute to their agency  goals, as appropriate—that is, they should identify which specific tax  expenditures contribute to specific strategic objectives and agency priority  goals.

	Agency Comments

We provided a draft of this report for review and comment to the  Secretaries of Agriculture, Commerce, Defense, Education, Energy,  Health and Human Services, Homeland Security, Housing and Urban  Development, the Interior, Labor, State, Transportation, the Treasury, and  Veterans Affairs; the Attorney General of the United States; the Directors  of the Office of Management and Budget, and the National Science  Foundation; the Administrators of the Environmental Protection Agency,  General Services Administration, National Aeronautics and Space  Administration, Small Business Administration and the U.S. Agency for  International Development; the Acting Director of the Office of Personnel  Management; the Acting Commissioner of the Social Security  Administration; and the Chairman of the Nuclear Regulatory Commission.
OMB staff spoke with us about their comments on our report and  generally agreed with the recommendation and further noted that  implementing it could be beneficial. However, they also said it is not an  effort they are currently pursuing due to competing priorities, as well as  capacity and resource constraints. They also provided technical  comments, which we incorporated as appropriate.
The following agencies provided technical comments that were  incorporated into the draft as appropriate: The Departments of Energy,  Health and Human Services, Housing and Urban Development, the  Interior, and Labor.
The following agencies had no comments on the draft report: The  Departments of Agriculture, Commerce, Defense, Education, Homeland  Security, Justice, State, Transportation, the Treasury, and Veterans  Affairs; the Environmental Protection Agency; the General Services  Administration; the National Aeronautics and Space Administration; the  National Science Foundation; the Nuclear Regulatory Commission; the  Office of Personnel Management; the Small Business Administration; the  Social Security Administration; and the U.S. Agency for International  Development.
We are sending copies of this report to the Director of OMB, Secretary of  the Treasury, and the heads of the other agencies we reviewed, as well  as appropriate congressional committees. In addition, this report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-6806 or krauseh@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  the appendix.

Appendix I: GAO Contact and Staff Acknowledgments

	GAO Contact

Heather Krause, (202-512-6806) or krauseh@gao.gov.

	Staff Acknowledgments

In addition to the contact named above, Jeff Arkin (Assistant Director),  Amy Radovich (Analyst-in-Charge), Amy Bowser, Hannah Dodd, Robert  Gebhart, Carol Henn, Susan Irving, Benjamin Licht, Donna Miller, Ed  Nannenhorn, Cynthia Saunders, MaryLynn Sergent, Timothy Shaw, and  Emily Upstill made significant contributions to this report.

Summary:
Why GAO Did This Study

Tax expenditures—special credits, deductions, and other tax provisions that reduce taxpayers’ tax liabilities—represent a substantial federal commitment. If Treasury’s estimates are summed, an estimated $1.23 trillion in federal revenue was forgone from the 169 tax expenditures reported for fiscal year 2015, an amount comparable to discretionary spending. Tax expenditures are often aimed at policy goals similar to those of federal spending programs.
GAO was asked to identify the extent to which tax expenditures are incorporated into federal budget processes. This report (1) compares the treatment of tax expenditures and other spending in federal budgeting processes; (2) evaluates the extent to which OMB and agencies have identified tax expenditures’ contributions to agency goals; and (3) examines options to further incorporate tax expenditures in federal budgeting processes. To address these objectives, GAO reviewed agency budget documents, OMB guidance, prior GAO reports, and performance plans and reports available as of January 2016 for all 24 CFO Act agencies. GAO also held a roundtable discussion with budget and tax experts to examine options for further incorporating tax expenditures into budgeting processes.

What GAO Found

Federal budget formulation processes include fewer controls and reviews, and provide less information on tax expenditures—which represented an estimated $1.23 trillion in forgone revenues in fiscal year 2015—than for discretionary or mandatory spending. For example, in the President’s budget, tax expenditure revenue loss estimates are presented separately from related spending, making their relative contributions toward national priorities less visible than spending programs. Likewise, only proposed tax expenditures or those that expire are subject to review within congressional budget processes, similar to mandatory spending. Existing, non-expiring tax expenditures are not subject to such review.
The Office and Management and Budget (OMB) and agencies have made limited progress identifying tax expenditures’ contribution to agency goals. As of January 2016, 7 of the 24 Chief Financial Officer (CFO) Act agencies identified tax expenditures as contributors to their agency goals—as directed in OMB guidance—or agency missions. The tax expenditures they identified accounted for only 11 of the 169 tax expenditures included in the President’s Budget for Fiscal Year 2017, representing an estimated $31.9 billion of $1.23 trillion in forgone revenues for fiscal year 2015. Based on interviews with agencies and reviewing past GAO work, GAO found that a lack of clarity about agencies’ roles leads to inaction in identifying tax expenditures that contribute to agency goals. To address this, OMB guidance previously stated that it would work with the Department of the Treasury (Treasury) and other agencies to identify where tax expenditures align with agency goals. OMB removed that language in June 2015, citing capacity constraints. Without additional OMB and Treasury assistance, agencies may continue to have difficulty identifying whether, or which of, the remaining 158 tax expenditures—representing $1.20 trillion in forgone revenues—contribute to their goals.
Based on an assessment of budget and tax experts’ input and prior GAO work, GAO found that options to further incorporate tax expenditures into budgeting processes could help achieve various benefits; but policymakers would need to consider challenges and tradeoffs in deciding whether or how to implement them. For example, one option is to require that all, or some subset of, tax expenditures expire after a finite period. This option could result in greater oversight, requiring policymakers to explicitly decide whether to extend more or all tax expenditures. However, this option could lead to frequent changes in the tax code, such as from extended or expired tax expenditures, which can create uncertainty and make tax planning more difficult, as GAO has reported previously.

What GAO Recommends

GAO recommends that OMB, in collaboration with Treasury, work with agencies to identify which tax expenditures contribute to agency goals. OMB generally agreed with GAO’s recommendation.