TAX POLICY

Factors for Evaluating 

Expiring Tax Provisions 

Statement of James R. White, Director 

Strategic Issues

Testimony 

Before the Subcommittee on Select 

Revenue Measures, Committee on Ways 

and Means, House of Representatives

For Release on Delivery 

Expected at 9:30 a.m. EDT

Friday, June 8, 2012

GAO-12-760T

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-760T, a testimony 

before the Subcommittee on Select Revenue 

Measures, Committee on Ways and Means, 

House of Representatives 

June 8, 2012 

TAX POLICY

Factors for Evaluating Expiring Tax Provisions

Why GAO Did This Study

GAO was asked to discuss the 

extension of tax provisions, sometimes 

called tax extenders, that either 

expired in 2011 or are scheduled to 

expire at the end of 2012. For a prior 

hearing of this subcommittee, the Joint 

Committee on Taxation (JCT) prepared 

a document detailing 64 expiring tax 

provisions. Most of these provisions 

are tax expenditures—reductions in a 

federal taxpayer’s tax liability that 

result from special credits, deductions, 

exemptions and exclusions from 

taxation, deferral of tax liability, and 

preferential tax rates. Tax expenditures 

are often aimed at policy goals similar 

to those of spending programs, such 

as encouraging economic development 

in disadvantaged areas and stimulating 

research and development. Because 

revenue is foregone, these provisions

may, in effect, be viewed as spending 

programs channeled through the tax 

system. For those provisions the 

President proposed extending through 

2013, JCT estimated the budgetary 

effect would be at least $40 billion in 

foregone revenue over its 10-year 

budget window. 

This testimony outlines factors useful 

for considering trade-offs when 

deciding whether and how to extend 

provisions and illustrates their 

application to some of the expiring 

provisions. GAO’s testimony is based 

on previous work on tax reform and tax 

expenditures. 

What GAO Recommends

GAO has made many 

recommendations in its previous

reports on tax expenditures that reflect

the factors described in this testimony. 

Some have been acted on, while 

others have not. 

What GAO Found

Factors commonly used to evaluate tax policy, as well as other policy tools such 

as spending programs or regulations, can be applied to decisions about whether 

and how to extend expiring tax expenditures, as discussed below. 

Revenue Effects. Revenues foregone through tax expenditures either reduce 

resources available to fund other federal activities or require higher tax rates to 

raise a given amount of revenue. Like decisions about spending, deciding 

whether to extend an expiring tax expenditure involves considering whether the 

benefit of the intended outcome is worth the effect on other programs or tax 

rates. The nation’s long-term fiscal challenge makes it all the more important to 

ensure tax expenditures are efficient and relevant.

Criteria for Good Tax Policy. Three long-standing criteria typically used to 

evaluate tax policy—equity; economic efficiency; and a combination of simplicity, 

transparency, and administrability—can be applied to the expiring tax 

expenditures. Because the criteria may sometimes conflict with one another, 

there are usually trade-offs to consider when evaluating particular tax 

expenditures.

Relationship to Other Policy Tools. Tax expenditures represent just one policy 

tool of several—including spending, grants, loans, and regulations—that 

policymakers can use to achieve policy goals. If not well designed, tax 

expenditures can create the potential for duplication with other policy tools. 

Measurement Challenges. Unavailable or insufficient data can hinder 

policymakers’ ability to consider how the factors described above relate to 

particular tax expenditures. A key challenge is that data necessary to assess how 

a tax expenditure is used and by whom generally are not collected on tax returns 

unless the Internal Revenue Service needs the information to ensure tax 

compliance or is legislatively mandated to collect or report the information. 

GAO’s prior reports on tax expenditures illustrate how these factors can be used 

to evaluate whether and how to extend expiring tax provisions. For example, 

GAO found that the research tax credit, as currently designed, provides many 

recipients with windfall benefits earned for spending they would have done 

anyway. A report on domestic ethanol production—in which GAO suggested 

modifying or phasing out a tax credit that was duplicative of the renewable-fuel 

standard—highlights the importance of considering how tax expenditures relate 

to other policy tools. GAO’s work on higher-education tax expenditures illustrates 

how tax expenditures that are not transparent (i.e., cannot be easily understood 

by taxpayers) can result in taxpayers making decisions that do not maximize their 

tax benefits. This work also concluded that little is known about the effectiveness 

of education-related federal grants, loans, and tax expenditures in promoting 

certain student outcomes, such as college attendance. Research gaps may be 

due, in part, to data and methodological challenges—such as difficulty isolating 

the behavioral effects of the tax expenditure under study from other changes—

that have proven difficult to overcome. 

View GAO-12-760T. For more information, 

contact James R. White at (202) 512-9110 or 

whitej@gao.gov. 
 

Page 1 GAO-12-760T 

Chairman Tiberi, Ranking Member Neal, and Members of the 

Subcommittee:

I am pleased to be here to discuss the extension of tax provisions, 

sometimes called tax extenders, which either expired in 2011 or are 

scheduled to expire at the end of 2012. These provisions were the subject 

of an April hearing before this subcommittee, for which the Joint 

Committee on Taxation (JCT) prepared a document detailing 64 expiring 

provisions.1 Most of the 64 expiring provisions are tax expenditures—

reductions in a federal taxpayer’s tax liability that result from special 

credits, deductions, exemptions and exclusions from taxation, deferral of 

tax liability, and preferential tax rates.2 Tax expenditures are provisions 

that are exceptions to the “normal structure” of the individual and 

corporate income tax. Other provisions that reduce tax liability, such as 

many deductions for business expenses, are considered to be part of the 

normal tax structure and are not considered tax expenditures.3

Tax expenditures are often aimed at policy goals similar to those of 

spending programs, such as encouraging economic development in 

disadvantaged areas, promoting energy efficiency, or stimulating 

 

1

For the purposes of that hearing, a tax extender was defined as any tax provision 

extended in title VII of the Tax Relief, Unemployment Insurance Reauthorization, and Job 

Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296 (Dec. 17, 2010), or expiring 

between the end of calendar year 2011 and the end of calendar year 2012, other than any 

provision addressed in titles I through VI of Pub. L. No. 111-312 or related to a 

transportation trust fund. For a list of the 64 expiring provisions, see Joint Committee on 

Taxation, Legislative Background of Selected Federal Tax Provisions Scheduled to Expire 

in 2011 or 2012, JCX-39-12 (Washington, D.C.: Apr. 25, 2012). Also, the list of 64 

provisions does not include (1) individual income tax rate reductions, enacted into law 

primarily by the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 

107-16, 115 Stat. 38 (June 7, 2001); (2) an increase in the exemption amount under the 

Alternative Minimum Tax enacted by the Jobs and Growth Tax Relief Reconciliation Act of 

2003, Pub. L. No. 108-27, 117 Stat. 752 (May 28, 2003); (3) a reduction of Social Security 

tax rates for employees and self-employed individuals, initially enacted for 2011 by the 

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. 

L. No. 111-312, 124 Stat. 3296 (Dec. 17, 2010); or (4) provisions on temporary disaster 

relief.

2

Examples of expiring provisions that are not tax expenditures are those covering the 

disclosure of prisoner tax return information to certain prison officials under 26 U.S.C. 

6103(k)(10) and refunds disregarded in the administration of federal programs and 

federally assisted programs under 26 U.S.C. 6409. 

3

The concept of tax expenditures extends beyond the income tax. Tax expenditures also 

exist for other types of taxes, such as excise taxes. 

 
 

Page 2 GAO-12-760T 

research and development. Because revenue is foregone, these 

provisions may, in effect, be viewed as spending programs channeled 

through the tax system. JCT’s publication providing revenue estimates for 

provisions contained in the President’s fiscal year 2013 budget proposal 

does not include all of the 64 expiring provisions. However, for those 

provisions the President proposed extending through 2013, JCT 

estimated that the budgetary effect would be at least $40 billion in 

foregone revenue over its 10-year budget window.4

Like budget decisions for spending programs, decisions on whether and 

how to extend expiring tax provisions involve trade-offs between policy 

goals and revenue costs. My testimony today will outline a set of factors 

useful for understanding these trade-offs and illustrate their application to 

some of the expiring provisions. Although the main focus of my testimony 

is on how the factors apply to evaluating expiring tax expenditure 

provisions, the factors are also relevant to evaluating other expiring 

provisions, such as those related to tax administration. This testimony is 

based on previous GAO reports on tax reform and tax expenditures. 

Additional information on our scope and methodology is available in those 

published products, which are referenced throughout this statement.

The work for this testimony and the reports on tax expenditures upon 

which it is based were conducted in accordance with generally accepted 

government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide 

a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our audit objectives.

 

4

Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions 

Contained in the President’s Fiscal Year 2013 Budget Proposal, JCX-27-12 (Washington, 

D.C.: Mar. 14, 2012). JCT revenue estimates compare predicted federal revenues under a 

proposal with predicted revenues under present law. JCT provides a year-by-year 

comparison for a 10-year budget window, which we provide for this and each example 

listed below. Negative estimates reflect decreased revenue, and positive estimates reflect 

increased revenue. Revenue estimates take certain behavioral responses into account.
 

Page 3 GAO-12-760T 

Factors commonly used to evaluate tax policy in general can be applied 

to decisions of whether and how to extend expiring tax provisions, 

including tax expenditure provisions. The factors, listed in table 1 and 

discussed below, may also be relevant to evaluating other policy tools, 

such as spending programs or regulations.5

Table 1: Factors to Consider When Evaluating Expiring Tax Provisions

1. Revenue effects 

2. Criteria for good tax policy

Equity

Economic efficiency

Simplicity, transparency, and administrability 

3. Relationship to other policy tools 

4. Measurement challenges 

Source: GAO.

1. Revenue Effects. Tax expenditures may, in effect, be viewed as 

spending programs channeled through the tax system. Tax expenditures 

can be viewed this way because they grant special tax relief for certain 

kinds of behavior by a taxpayer or for taxpayers in special circumstances. 

Revenues foregone through tax expenditures either reduce funding 

available for other federal activities or require higher tax rates to raise a 

given amount of revenue. Like decisions about spending, deciding 

whether to extend an expiring tax expenditure involves considering 

whether the benefit of the intended outcome is worth the effect on other 

programs or tax rates. Revenue the government would have collected 

absent a tax expenditure could have been used for other federal priorities, 

deficit reduction, or tax rate reductions.

The long-term fiscal challenge facing the United States makes it all the 

more important to ensure all major federal spending and tax programs 

and policies—including tax expenditures—are efficient and relevant. 

Although the expiring tax expenditures being discussed today represent 

only a portion of all tax expenditures, on the whole, tax expenditures 

represent a substantial federal commitment. Aggregate revenue losses 

 

5

These factors have been described in our previous reports. For example, we discuss 

criteria for good tax policy in GAO, Understanding the Tax Reform Debate: Background, 

Criteria, & Questions, GAO-05-1009SP (Washington, D.C.: September 2005). 

Factors to Consider 

When Evaluating 

Expiring Tax 

Provisions
 

Page 4 GAO-12-760T 

were an estimated $1 trillion in fiscal year 2011.6

2. Criteria for Good Tax Policy. Three long-standing criteria typically 

used to evaluate tax policy—equity; economic efficiency; and a 

combination of simplicity, transparency, and administrability—can be 

applied to the expiring tax expenditures.

For the past three 

decades, annual revenue losses from all tax expenditures have been 

similar to the amount of discretionary spending each year. As such, 

evaluating tax expenditures, including the expiring provisions being 

considered today, can help policymakers assess how to alleviate the 

rapidly building fiscal pressures facing our national government.

7

• Equity. There is a wide range of opinions regarding the fairness or 

equity of tax provisions. Nevertheless, certain principles, such as a 

taxpayer’s ability to pay taxes and the extent to which a taxpayer 

benefits from a provision, are useful for thinking about equity. 

Similarly, analytical tools, such as distributional analysis, can provide 

information about who pays or benefits that may inform value 

judgments about the equity effects of the expiring tax expenditures.

The criteria may sometimes 

conflict with one another and some are subjective. As a result, there are 

usually trade-offs to consider between the criteria when evaluating 

particular tax expenditures or other tax provisions.

• Economic efficiency. The expiring tax provisions generally are 

efforts to redirect society’s resources to achieve a variety of economic 

or social goals. Lightly taxing some activities targeted by the expiring

provisions shifts resources to them and away from less-tax-favored 

activities. For example, the research tax credit is designed to increase 

the overall level of resources that the private sector invests in 

research, but this comes at the cost of fewer resources devoted to 

other activities. To the extent that a tax provision shifts resources to 

an activity that provides greater economic benefits to society as a 

whole than the private sector would provide on its own, there is a net 

 

6

Summing revenue loss estimates does not take into account possible interactions 

between individual provisions or potential behavioral responses to changes in these 

provisions on the part of taxpayers. Additionally, revenue loss estimates include the effect 

of certain tax credits on receipts only and not the effect of the credits on outlays. While 

revenue estimates do take certain behavioral responses into account, tax expenditure 

revenue loss estimates do not. 

7

GAO-05-1009SP. 
 

Page 5 GAO-12-760T 

gain that is said to improve economic efficiency. These gains improve 

peoples’ well-being in a variety of ways, including increased income 

and consumption opportunities.

Estimating efficiency gains and losses can be challenging. Studies 

may be limited by what can be quantified; for example, studies may 

examine dollars spent on qualified research or the number of 

economic development projects built, rather than whether the use of 

funds for these activities constitute a better use of resources.

• Simplicity, transparency, and administrability. A tax expenditure’s 

design can affect three related and desirable features of tax 

provisions: simplicity, transparency, and administrability. Simple tax 

expenditures impose less taxpayer compliance burden, such as 

keeping records, learning about tax rules, filing tax returns, and other 

compliance activities. Transparent tax provisions are easy to 

understand, that is, taxpayers can grasp the logic behind them. 

Administrable tax expenditures have lower administrative costs for 

both the Internal Revenue Service (IRS) and third parties, such as 

banks or employers required to submit information on taxpayers’ 

income and transactions to IRS. Administration includes processing 

returns, programming information systems, answering taxpayer 

questions, and enforcement activities. Simplicity, transparency, and 

administrability are not the same but are interrelated. For example, 

extensions of expiring tax code provisions, sometimes retroactively, 

can add compliance burden, reduce taxpayers’ understanding of the 

tax laws, and impose additional costs on IRS, such as more phone 

calls from taxpayers.8

3. Relationship to Other Policy Tools. Tax expenditures are one policy 

tool out of several—including spending, grants, loans and loan 

guarantees, and regulations—that policymakers can use to achieve public 

goals. The choice of whether to use tax expenditures, spending, or other 

tools depends on which approach better meets the goal at the lowest 

cost.

• Different policy tools may be more effective than others in achieving a 

particular policy outcome. With tax expenditures, certain activities may 

be cheaper and simpler to subsidize through the tax code because 

 

8

GAO, 2011 Tax Filing: Processing Gains, but Taxpayer Assistance Could Be Enhanced 

by More Self-Service Tools, GAO-12-176 (Washington, D.C.: Dec. 15, 2011).
 

Page 6 GAO-12-760T 

IRS has the administrative infrastructure to collect and remit money to 

millions of taxpayers. For example, the incremental administrative and 

compliance costs to deliver the tax credit for child and dependent care 

expenses may be relatively low compared to the costs of setting up a 

separate system for processing child care applications and sending 

vouchers to those eligible.9

• How a tax expenditure is designed can affect its revenue effects and 

how it relates to the criteria for a good tax system. For example, 

depending on their design, tax expenditures can result in taxpayers 

receiving benefits for actions they would have taken absent the tax 

expenditure. Also, each type of tax expenditure creates tax savings in 

different ways and, consequently, reduces federal revenues in 

different ways and may have different distributional effects. The 

amount of tax relief per dollar that a taxpayer receives using an 

exclusion, exemption, or deduction depends on the taxpayer’s 

marginal tax rate. Generally, the higher a taxpayer’s marginal tax rate, 

the greater the tax savings from these tax expenditure types. Tax 

credits reduce tax liability dollar-for-dollar, so the value of a credit is 

the same regardless of a taxpayer’s marginal tax rate.

• The Government Performance and Results Act (GPRA) 

Modernization Act of 2010 (GPRAMA)10 can help in evaluating tax 

expenditures in that it establishes a framework for providing a more 

crosscutting and integrated approach to focusing on results and 

improving government performance. GPRAMA makes clear that tax 

expenditures are to be included in identifying the range of federal 

agencies and activities that contribute to crosscutting goals. Moving 

forward, GPRAMA implementation can help inform tough choices in 

setting priorities as policymakers address the rapidly building fiscal 

pressures facing our national government.

• If not well designed or effectively implemented, tax expenditures can 

contribute to mission fragmentation and program overlap, thus 

creating the potential for duplication with other policy tools. All federal 

spending and tax policy tools, including tax expenditures, should be 

 

9

GAO, Government Performance and Accountability: Tax Expenditures Represent a 

Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690 

(Washington, D.C.: Sept. 23, 2005). 

10Pub. L. No. 111-352, 124 Stat. 3866 (Jan. 4, 2011). 
 

Page 7 GAO-12-760T 

reexamined to ensure that they are achieving their intended purposes 

and are designed in the most efficient and equitable manner.

4. Measurement Challenges. Unavailable or insufficient data can hinder 

policymakers’ ability to consider how the factors described above relate to 

particular tax expenditures. A key challenge is that data necessary to 

assess how and by whom a tax expenditure is used generally are not 

collected on tax returns unless IRS needs the information to ensure tax 

compliance or is legislatively mandated to collect or report the 

information. In some cases, IRS may combine reporting requirements to 

minimize its workload and taxpayer burden, and as a result, the 

information collected may not identify specific beneficiaries or activities 

targeted by a tax expenditure. Also, the influence of other economic and 

social factors can confound efforts to measure a tax expenditure’s effects 

on efficiency and equity. We and the Office of Management and Budget 

(OMB) have noted that the desired outcomes of a tax expenditure or 

other policy tool are often the combination of effects of the program and 

external factors.11

If policymakers conclude that additional data would facilitate reexamining 

a particular tax expenditure, decisions would be required on what data 

are needed, who should provide the data, who should collect the data, 

how to collect the data, what it would cost to collect the data, and whether 

the benefits of collecting additional data warrant the cost of doing so. 

Another factor to consider is how to facilitate data sharing and 

collaborative evaluation efforts amongst federal agencies.

 

11GAO, Designing Evaluations: 2012 Revision, GAO-12-208G (Washington, D.C.: Jan. 31, 

2012); and Office of Management and Budget, Analytical Perspectives, Budget of the 

United States Government, Fiscal Year 2013 (Washington, D.C.: 2012).
 

Page 8 GAO-12-760T 

Our prior reports on tax expenditures illustrate how these factors can be 

used to help evaluate whether and how to extend expiring tax provisions.

Domestic Ethanol Production. Our past work related to domestic 

ethanol production highlights the importance of considering how tax 

expenditures relate to other policy tools.12 Congress has supported 

domestic ethanol production through two policy tools: (1) a tax credit, the 

most recent version of which expired after December 31, 2011, and (2) a 

renewable-fuel standard that generally requires transportation fuels in the 

United States to contain certain volumes of biofuels, such as ethanol. In 

2009, we reported that the tax credit was important in helping to create a 

profitable corn starch ethanol industry when the industry had to fund 

investment in new facilities, but is less important now for sustaining the 

industry because most of the capital investment has already been made. 

We found that Congress’s efforts to support domestic ethanol production 

through a tax credit and renewable-fuel standard were duplicative. The 

fuel standard is now at a level high enough to ensure that a market for 

domestic ethanol production exists in the absence of the ethanol tax 

credit. As such, we suggested that Congress consider modifying the 

credit or phasing it out. Congress allowed the credit to expire at the end of 

2011. JCT did not include an estimate of the budgetary effect of 

extending the credit through December 31, 2013, in its March 2012 

estimates, as the President did not propose to extend the credit.

13

Higher Education. Our past work on higher-education tax expenditures 

illustrates how tax expenditures that are not transparent (i.e., cannot be 

easily understood by taxpayers) can result in taxpayers making decisions 

 

12GAO, Follow-up on 2011 Report: Status of Actions Taken to Reduce Duplication, 

Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue, GAO-12-453SP 

(Washington, D.C.: Feb. 28, 2012); Opportunities to Reduce Potential Duplication in 

Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-318SP 

(Washington, D.C.: Mar. 1, 2011); and Biofuels: Potential Effects and Challenges of 

Required Increases in Production and Use, GAO-09-446 (Washington, D.C.: Aug. 25, 

2009). 

13Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions 

Contained in the President’s Fiscal Year 2013 Budget Proposal. JCT revenue estimates 

compare predicted federal revenues under a proposal with predicted revenues under 

present law. JCT provides a year-by-year comparison for a 10-year budget window, which 

we provide for the examples listed below. Revenue estimates incorporate certain 

behavioral responses.

Illustrating These 

Factors Using 

Examples from GAO’s 

Past Work
 

Page 9 GAO-12-760T 

that do not maximize their tax benefits.14 The tuition and fees deduction, 

which expired after December 31, 2011, helped students and their 

families pay for higher education by allowing them to deduct qualified 

education expenses from income that would otherwise be taxable. In 

2008, we found that tax filers did not always claim higher-education tax 

expenditures, such as the tuition and fees deduction, that maximize their 

potential tax benefits, potentially because of the complexity of highereducation tax provisions.15

Higher education tax expenditures also illustrate how measurement and 

methodological challenges can impede evaluating their effectiveness. In 

2005, we reported that little is known about the effectiveness of 

education-related federal grants, loans, and tax expenditures in promoting 

student outcomes including college attendance, students’ choice among 

colleges, and the likelihood that students will continue their education. We 

also found that research gaps may be due, in part, to data and 

methodological challenges—such as difficulty isolating the behavioral 

effects of the tax expenditure under study from other changes—that have 

proven difficult to overcome.

Further analysis and simplification of the tax 

provisions involved could potentially increase transparency in the system. 

JCT estimates the budgetary effect of extending this provision through 

December 31, 2013, would be about $1.5 billion in fiscal years 2012-

2022.

Research Tax Credit. Our past work on the research tax credit provides 

insights into how improving the design of a tax expenditure could improve 

its economic efficiency and reduce revenue costs.16

 

14GAO, Higher Education: Multiple Higher Education Tax Incentives Create Opportunities 

for Taxpayers to Make Costly Mistakes,

Economists widely 

agree that some government subsidy for research is justified because the 

social returns from research exceed the private returns that investors 

GAO-08-717T (Washington, D.C.: May 1, 2008); 

Student Aid and Postsecondary Tax Preferences: Limited Research Exists on 

Effectiveness of Tools to Assist Students and Families through Title IV Student Aid and 

Tax Preferences, GAO-05-684 (Washington, D.C.: July 29, 2005).

15In a forthcoming report, we will update our analysis on the extent to which filers select 

higher education provisions that maximize their tax benefit. 

16GAO-11-318SP; GAO, Tax Policy: The Research Tax Credit’s Design and Administration 

Can Be Improved, GAO-10-136 (Washington, D.C.: Nov. 6, 2009); Tax Policy: Additional 

Information on the Research Tax Credit, GAO/T-GGD-95-161 (Washington, D.C.: May 10, 

1995).
 

Page 10 GAO-12-760T 

receive. Since 1981, the research tax credit has provided significant 

subsidies (an estimated $6 billion for fiscal year 2011) to encourage 

business to invest in research and development. The most recent version 

of the credit expired after December 31, 2011. Despite the widespread 

support for the concept of a credit for increasing research activities, 

concerns have been raised about the cost-effectiveness of the design of 

the current credit and its administrative and compliance costs. We found 

that the research tax credit, as currently designed, distributes incentives 

unevenly across taxpayers and provides many recipients with windfall 

benefits, earned for research that they would have done anyway. For 

example, we found that for those claiming the regular credit, more than 

half of the credit such claimants earned was a windfall. The disparities in 

incentives can lead to an inefficient allocation of investment resources 

across businesses, and the windfall benefits represent foregone tax 

revenue that does not contribute to the credit’s objective. Accordingly, we 

suggested that Congress modify the research tax credit to reduce 

economic inefficiencies and excessive revenue costs. JCT estimates the 

budgetary effect of the President’s proposal to enhance and make 

permanent this provision would be about $99 billion in fiscal years 2012-

2022.

Our past work on the research tax credit also provides insight into how 

tax expenditure design can affect transparency and administrability. In 

2009, we reported that there are numerous areas of disagreement 

between IRS and taxpayers concerning what types of spending qualify for 

the research credit because of issues such as the definitions used to 

determine eligibility and the documentation needed to support the claim. 

These disputes raise the cost of the credit to both taxpayers and IRS and 

diminish the credit’s incentive effect by making the ultimate benefit to 

taxpayers less certain. We made several recommendations to the 

Department of the Treasury (Treasury) to reduce the uncertainty that 

some taxpayers have about their ability to earn credits for their research 

activities. To date, Treasury has not fully implemented these 

recommendations.

New Markets Tax Credit (NMTC). Our past work on the NMTC provides 

examples highlighting issues of simplicity and the need to consider tax 
 

Page 11 GAO-12-760T 

expenditures in light of other policy tools.17 Congress enacted the NMTC 

in 2000 as part of an ongoing effort to revitalize low-income communities. 

Treasury awards tax credits to Community Development Entities (CDE), 

which sell the credits to investors to raise funds. JCT estimates the 

budgetary effect of the President’s proposal extending and modifying the 

NMTC would be about $3.5 billion in fiscal years 2012-2022.18

In 2007, we reported that the NMTC appeared to increase investment in 

low-income communities.19

Revitalization Programs. Our past work on revitalization programs, 

including the Empowerment Zone (EZ), Enterprise Community (EC), and 

Renewal Community (RC) programs, provides an example of 

However, in 2010 we reported that the 

complexity of NMTC transaction structures appeared to make it difficult to 

complete smaller projects and often results in less of the money investors 

initially put into the project ending up in low-income community 

businesses—the beneficiaries of NMTC financing—than would be the 

case if the program were simplified. We suggested Congress consider 

offering grants to CDEs that would provide the funds to low-income 

community businesses and assess the extent to which the grant program 

would increase the amount of federal subsidy provided to low-income 

community businesses compared to the NMTC. One option would be for 

Congress to set aside a portion of funds to be used as grants and a 

portion to be used as tax credits under the current NMTC program to 

facilitate a comparison of the two programs.

 

17GAO-11-318SP; GAO, New Markets Tax Credit: The Credit Helps Fund a Variety of 

Projects in Low-Income Communities, but Could Be Simplified, GAO-10-334 (Washington, 

D.C.: Jan. 29, 2010). 

18The President’s Fiscal Year 2013 Budget proposed extending the program through 2013 

with $5 billion available for allocation in both 2012 and 2013. The proposal would also 

modify the NMTC to offset alternative minimum tax liability. 

19GAO, Tax Policy: New Markets Tax Credit Appears to Increase Investment by Investors 

in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance, 

GAO-07-296 (Washington, D.C.: Jan. 31, 2007).
 

Page 12 GAO-12-760T 

measurement challenges when evaluating tax expenditures.20

Our prior work has found improvements in certain measures of 

community development in EZ communities, but data and methodological 

challenges make it difficult to establish causal links. In the case of the EZ, 

EC, and RC programs, the lack of tax benefit data limited the ability of the 

Department of Housing and Urban Development (HUD) and the 

Department of Agriculture to evaluate the overall mix of grant and tax 

programs to revitalize selected urban and rural communities. In response 

to our recommendations, HUD and the IRS collaborated to share data on 

some program tax credits. However, the IRS data did not tie the program 

tax incentives to specific designated communities, making it difficult to 

assess the effect of the tax benefits. We have previously reported that if 

Congress authorizes similar programs that rely heavily on tax 

expenditures in the future, it would be prudent for federal agencies 

responsible for administering the programs to collect information 

necessary for determining whether the tax benefits are effective in 

achieving program goals.

Congress 

established the EZ, EC, and RC programs to reduce unemployment and 

generate economic growth in selected Census tracts. Urban and rural 

communities designated as EZs, ECs, or RCs received grants, tax 

expenditures, or a combination of both to stimulate community 

development and business activity. Tax provisions for empowerment 

zones and the District of Columbia (DC) enterprise zone (including the 

first-time homebuyer credit for the District of Columbia) expired after 

December 31, 2011. JCT estimates that the budgetary effect of extending 

these provisions through December 31, 2013, would be $585 million from 

fiscal years 2012-2022.

21

Nonbusiness Energy Property Credit. Our work on the nonbusiness 

energy property credit highlights the importance of considering revenue 

 

20GAO-11-318SP; GAO, Revitalization Programs: Empowerment Zones, Enterprise 

Communities, and Renewal Communities, GAO-10-464R (Washington, D.C.: Mar. 12, 

2010); Empowerment Zone and Enterprise Community Program: Improvements Occurred 

in Communities, but the Effect of the Program Is Unclear, GAO-06-727 (Washington, D.C.: 

Sept. 22, 2006); Community Development: Federal Revitalization Programs Are Being 

Implemented, but Data on the Use of Tax Benefits Are Limited, GAO-04-306 (Washington, 

D.C.: Mar. 5, 2004).

21GAO, Community Development: Limited Information on the Use and Effectiveness of 

Tax Expenditures Could Be Mitigated through Congressional Action, GAO-12-262 

(Washington, D.C.: Feb. 29, 2012). 
 

Page 13 GAO-12-760T 

foregone and the criteria for good tax policy when determining whether 

and how to extend specific tax provisions.22

The design of the credit affects its economic efficiency and revenue costs. 

The credit combines features of both cost-based and performance-based 

credits. Cost-based credits provide incentives that are usually a fixed 

percentage of qualified spending, whereas performance-based credits 

provide incentives that are tied to specific measures of energy savings 

and therefore may require before and after energy audits. The 

nonbusiness energy property credit is cost-based in that the amount of 

credit claimed is directly proportional to a taxpayer’s qualified spending. It 

is performance-based in that only certain qualifying purchases are 

eligible. In 2012, we reported that both the performance-based and costbased credits have advantages and disadvantages with neither design 

being unambiguously the better option based on current information. For 

example, a performance-based credit is more likely to effectively reduce 

energy use and carbon dioxide emissions because it rewards energy 

savings from the investment rather than the cost-based credit’s rewarding 

of spending regardless of whether this spending results in energy 

savings. However, the performance-based credit may have significant upfront costs for energy audits, not required by the cost-based credit, which 

could reduce its effectiveness by discouraging investment.

Enacted as part of the Energy 

Policy Act of 2005, the nonbusiness energy property credit was intended 

to increase homeowners’ investment in energy-conserving improvements, 

such as insulation systems, exterior windows, and metal roofs, by 

reducing their after-tax costs. The credit expired on December 31, 2011. 

JCT estimates the budgetary effect of the President’s proposal extending 

and modifying this provision through December 31, 2013, would be about 

$2.4 billion in fiscal years 2012-2022.

The credit’s design also can affect its administrability and equity. For 

taxpayers who do invest, these up-front costs may mean that a 

performance-based credit may have significantly higher taxpayer 

compliance and IRS administrative costs than a cost-based credit. Views 

on what is a fair distribution of the credit’s costs and benefits can differ 

dramatically across individuals. However, whatever one’s views of 

 

22GAO, Energy Conservation and Climate Change: Factors to Consider in the Design of 

the Nonbusiness Energy Property Credit, GAO-12-318 (Washington, D.C.: Apr. 2, 2012). 
 

Page 14 GAO-12-760T 

fairness, an analysis of the distribution of costs and benefits by such 

factors as income level can be useful.

Indian Reservation Depreciation. Our work on this provision is another 

example of how measurement challenges can hinder evaluation of tax 

expenditures.23

In closing, considering the various factors I have laid out today can help 

when deciding whether and how to extend expiring tax provisions. 

Improving tax expenditure design may enable individual tax expenditures 

to achieve better results for the same revenue loss or the same results 

with less revenue loss. Also, reductions in revenue losses from 

eliminating ineffective or redundant tax expenditures could be substantial 

depending on the size of the eliminated provisions. As we have stated in 

prior reports,

The provision allows taxpayers to take larger deductions 

for depreciation from their business income earlier than they otherwise 

would be allowed for certain property on Indian reservations. For the 

deduction, taxpayers are not required to identify the reservation on which 

the depreciated property is located, preventing assessments linking 

investment to economic indicators on specific reservations. We 

suggested Congress consider requiring IRS to collect this information, but 

we noted that Congress would need to weigh the associated costs of 

collecting and analyzing the information as well as the effects on IRS’s 

other priorities. The credit expired on December 31, 2011. JCT estimates 

the budgetary effect of extending this provision through December 31, 

2013, would be $100 million in fiscal years 2012-2022.

24 we believe that tax expenditure performance is an area 

that would benefit from enhanced congressional scrutiny as Congress 

considers ways to address the nation’s long-term fiscal imbalance.

Chairman Tiberi, Ranking Member Neal, and Members of the 

Subcommittee, this completes my prepared statement. I would be happy 

to respond to any questions you and Members of the Subcommittee may 

have at this time.

 

23GAO, Tax Expenditures: Available Data Are Insufficient to Determine the Use and 

Impact of Indian Reservation Depreciation, GAO-08-731(Washington, D.C.: June 26, 

2008).

24GAO-05-690 and GAO, Tax Policy: Tax Expenditures Deserve More Scrutiny, 

GAO/GGD/AIMD-94-122 (Washington, D.C.: June 3, 1994). 
 

Page 15 GAO-12-760T 

For further information regarding this testimony, please contact James R. 

White, Director, Strategic Issues, at (202) 512-9110 or whitej@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this statement. Individuals 

making key contributions to this statement include Jeff Arkin, Assistant 

Director; Shannon Finnegan; Melanie Papasian; MaryLynn Sergent; Anne 

Stevens; and Sabrina Streagle. Kevin Daly, Tom Gilbert, Susan J. Irving, 

Thomas McCabe, Timothy Minelli, Ed Nannenhorn, Michael O’Neill, and 

Jim Wozny also provided technical support.

Contacts and Staff 

Acknowledgments

(450990)
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance 

to help Congress make informed oversight, policy, and funding decisions. 

GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no 

cost is through GAO’s website (www.gao.gov). Each weekday afternoon, 

GAO posts on its website newly released reports, testimony, and 

correspondence. To have GAO e-mail you a list of newly posted products, 

go to www.gao.gov and select “E-mail Updates.”

The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s website, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information.

Connect with GAO on Facebook, Flickr, Twitter, and YouTube. 

Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts. 

Visit GAO on the web at www.gao.gov. 

Contact:

Website: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-

4400, U.S. Government Accountability Office, 441 G Street NW, Room 

7125, Washington, DC 20548

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548

GAO’s Mission

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Phone

Connect with GAO

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Congressional 

Relations

Public Affairs

Please Print on Recycled Paper.