a

GAO

United States Government Accountability Office

Report to Agency Officials

September 2005 GOVERNMENT 

PERFORMANCE AND 

ACCOUNTABILITY

Tax Expenditures 

Represent a 

Substantial Federal 

Commitment and 

Need to Be 

Reexamined

GAO-05-690
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-690.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek, (202) 512-9110, brostekm@gao.gov. 

Highlights of GAO-05-690, a report to 

agency officials 

September 2005

GOVERNMENT PERFORMANCE AND 

ACCOUNTABILITY 

Tax Expenditures Represent a 

Substantial Federal Commitment and 

Need to Be Reexamined 

Whether gauged in numbers, revenues forgone, or compared to federal 

spending or the size of the economy, tax expenditures have represented a 

substantial federal commitment over the past three decades. Since 1974, the 

number of tax expenditures more than doubled and the sum of tax 

expenditure revenue loss estimates tripled in real terms to nearly $730 

billion in 2004. The 14 largest tax expenditures, headed by the individual 

income tax exclusion for employer-provided health care, accounted for 75 

percent of the aggregate revenue loss in fiscal year 2004. On an outlayequivalent basis, the sum of tax expenditure estimates exceeded 

discretionary spending for most years in the last decade. For some budget 

functions, the sum of tax expenditure estimates was of the same magnitude 

as or larger than federal spending. As a share of the economy, the sum of 

tax expenditure outlay-equivalent estimates has been about 7.5 percent of 

gross domestic product since the last major tax reform legislation in 1986. 

All federal spending and tax policy tools, including tax expenditures, should 

be reexamined to ensure that they are achieving their intended purposes 

and designed in the most efficient and effective manner. The nation’s 

current and projected fiscal imbalance serves to reinforce the importance of 

engaging in such a review and reassessment. Although data and 

methodological challenges exist, periodic reviews of tax expenditures could 

establish whether they are relevant to today’s needs; if so, how well they 

have worked to achieve their objectives; and whether the benefits from 

specific tax expenditures are greater than their costs. Over the past decade, 

however, the Executive Branch made little progress in integrating tax 

expenditures into the budget presentation, in developing a structure for 

evaluating tax expenditure outcomes or in incorporating them under review 

processes that apply to spending programs, as we recommended in 1994. 

More recently, the Administration has not used its Program Assessment 

Rating Tool process to systematically review tax expenditures or promote 

joint reviews of tax and spending programs sharing common goals. 

Sum of Tax Expenditure Estimates Compared with Total Federal Outlays, 1981-2004 

0

200

400

600

800

1,000

1,200

1,400

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Fiscal year

Dollars in billions (in constant 2004 dollars)

Mandatory spending Discretionary spending Tax expenditure outlay-equivalent estimates

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1983-2006.

Note: Summing tax expenditure estimates does not take into account interactions between 

individual provisions. 

Numerous federal programs, 

policies, and activities are 

supported through the tax code. As 

described in statute, tax 

expenditures are reductions in tax 

liabilities that result from 

preferential provisions, such as tax 

exclusions, credits, and deductions. 

They result in revenue forgone. 

This report, done under the 

Comptroller General’s authority, is 

part of an effort to assist Congress 

in reexamining and transforming 

the government to meet the many 

challenges and opportunities that 

we face in the 21st century. This 

report describes (1) how tax 

expenditures have changed over 

the past three decades in number, 

size, and in comparison to federal 

revenue, spending, and the 

economy, and (2) the amount of 

progress made since our 1994 

recommendations to improve 

scrutiny of tax expenditures. 

What GAO Recommends

GAO recommends the Office of 

Management and Budget (OMB), 

consulting with the U.S. 

Department of the Treasury, take 

several steps to ensure greater 

transparency of and accountability 

for tax expenditures by reporting 

better information on tax 

expenditure performance and more 

fully incorporating tax 

expenditures into federal 

performance management and 

budget review processes. Citing 

methodological and conceptual 

issues, OMB disagreed with the 

recommendations. GAO still 

believes the recommendations are 

valid. 
Page i GAO-05-690 Tax Expenditures

Contents

Letter 1

Results in Brief 4

Background 7

Tax Expenditures Have Represented a Substantial Federal 

Commitment over Time 19

Systematic Review of Tax Expenditures Is Integral to Reexamining 

the Federal Base, but Little Progress Has Been Made Since 1994 to 

Increase Scrutiny 43

Conclusions 71

Recommendations for Executive Action 73

Agency Comments and Our Evaluation 74

Appendixes

Appendix I: Scope and Methodology 79

Appendix II: Comments from the Office of Management and Budget 82

Appendix III: How Tax Expenditures Are Measured and Reported 92

Appendix IV: Compilation of Tax Expenditures Reported by Treasury 

(1974 to 2004) 110

Appendix V: Glossary 119

Appendix VI: GAO Contact and Acknowledgments 124

Selected Bibliography 125

Related GAO Products 127

Tables Table 1: Examples of Types of Tax Expenditures Available to 

Taxpayer Groups 10

Table 2: Revenue Loss Estimates for the Largest Tax Expenditures 

Reported for Fiscal Year 2004, with Taxpayer Group and 

Budget Function 34

Table 3: Comparison of Tax Expenditure Reporting by JCT and 

Treasury 96

Table 4: List of Tax Expenditures Reported by the U.S. Department 

of the Treasury and the Joint Committee on Taxation for 

Fiscal Year 2004 100
Contents

Page ii GAO-05-690 Tax Expenditures

Table 5: Sum of Revenue Loss Estimates for Tax Expenditures by 

Budget Function Reported by the U.S. Department of the 

Treasury and Joint Committee on Taxation, Fiscal Year 

2004 109

Table 6: Tax Expenditures Reported by the U.S. Department of the 

Treasury (1974 to 2004) 110

Figures Figure 1: Examples of How Each Type of Tax Expenditure Relates 

to the U.S. Individual Income Tax Return (Form 1040) 12

Figure 2: Number of Tax Expenditures Reported by Treasury, 

1974-2004 22

Figure 3: Duration of Tax Expenditures Reported by Treasury, 

1974-2004 24

Figure 4: Sum of Tax Expenditure Revenue Loss Estimates, 

1974-2004 26

Figure 5: Sum of Tax Expenditure Revenue Loss Estimates with 

Outlays for Refundable Tax Credits, 1974-2004 27

Figure 6: Tax Legislation Enacted From 1974-2004 That May Have 

Influenced the Sum of Revenue Loss Estimates for Tax 

Expenditures 30

Figure 7: Sum of Revenue Loss Estimates by Taxpayer Group, 

1974-2004 32

Figure 8: Sum of Tax Expenditure Outlay-equivalent Estimates 

Compared with Total Mandatory and Total Discretionary 

Outlays, 1981-2004 36

Figure 9: Sum of Tax Expenditure Outlay-Equivalent Estimates 

Compared to Total Mandatory and Discretionary Outlays 

and Receipts as a Percentage of GDP, 1981-2004 38

Figure 10: Size of Tax Expenditure Outlay-Equivalent Estimates by 

Budget Function, 1981-2004 39

Figure 11: Tax Expenditure Outlay-equivalent Estimates Compared 

with Federal Outlays by Budget Function, Fiscal Year 

2004 41

Figure 12: Composition of Spending as a Share of GDP under 

Baseline Extended 45

Figure 13: Composition of Spending as a Share of GDP Assuming 

Discretionary Spending Grows with GDP after 2005 and 

All Expiring Tax Provisions Are Extended 46

Figure 14: Treasury’s Supplemental Reporting for Comprehensive 

Income and Consumption Tax Baselines 94

Figure 15: Supplemental Estimates Developed by Treasury and 

JCT 98
Contents

Page iii GAO-05-690 Tax Expenditures

Figure 16: Sum of Revenue Loss Estimates Reported by the Joint 

Committee on Taxation and the U.S. Department of the 

Treasury (1987-2004) 99

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Page 1 GAO-05-690 Tax Expenditures

United States Government Accountability Office

Washington, D.C. 20548

A

September 23, 2005 Letr

The Honorable Joshua Bolten

Director

Office of Management and Budget

The Honorable John W. Snow

The Secretary of the Treasury 

Over the last decade, a culture of performance has taken root in the federal 

government. This culture has placed a greater premium on the importance 

of accountability for the effective use of public resources and authorities. 

Periodic reexamination of existing federal policies and operations offers 

the prospect of weeding out ineffective or outdated programs, policies, 

functions, or activities while strengthening and updating those that are 

retained. While inefficient and ineffective programs and policies are never 

appropriate, the nation’s long-term fiscal imbalance provides an additional 

impetus for reexamining all major spending programs and tax provisions.1

 

This includes tax incentives and subsidies intended to promote various 

social and economic objectives. Tax preferences—which are legally 

known as tax expenditures—result in forgone revenue for the federal 

government due to preferential provisions in the tax code, such as 

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

tax liability, and preferential tax rates. These tax expenditures are often 

aimed at policy goals similar to those of federal spending programs; 

existing tax expenditures, for example, are intended to encourage 

economic development in disadvantaged areas, finance postsecondary 

education, and stimulate research and development. Tax expenditures 

have a significant effect on overall tax rates—in that, for any given level of 

revenue, overall tax rates must be higher to offset the revenue forgone 

through tax expenditures—as well as the budget and fiscal flexibility. They 

also contribute to the growing complexity of the federal tax system. 

Regardless of the level of revenue deemed appropriate, tax expenditures—

like other federal programs or activities—should be reviewed to determine 

their effectiveness and continued relevance. Yet, tax expenditures and 

their relative contributions toward achieving federal missions and goals are 

often less visible than spending programs which are subject to more 

systematic review.

1

For more information, see GAO, 21st Century Challenges: Reexamining the Base of the 

Federal Government, GAO-05-325SP (Washington, D.C.: February 2005).
Page 2 GAO-05-690 Tax Expenditures

A little over a decade ago, GAO examined the growth in tax expenditures 

and opportunities to focus policymakers’ attention on them.2

 Our review 

found that tax expenditures were not integrated into annual federal budget 

review processes, and most were not subject to reauthorization, even 

though revenues forgone through tax expenditures were substantial. In 

turn, policymakers had few opportunities to make explicit comparisons or 

trade-offs between tax expenditures and federal spending programs. 

Therefore, we made several recommendations to the Office of Management 

and Budget (OMB) intended to encourage more informed policy debate 

about tax expenditures and to stimulate joint reviews of related tax and 

spending programs. OMB agreed that our recommendations were 

generally reasonable and reported that the Executive Branch had initiated 

efforts to integrate tax expenditures in the budget review process and 

develop performance measures for some tax expenditures. 

We have prepared this report under the Comptroller General’s authority as 

part of a continuing effort to assist Congress in reexamining the base of 

federal programs, policies, and activities critical to achieving fiscal 

discipline in the budget as a whole. This report updates our 1994 work and 

specifically describes (1) how tax expenditures have changed over the past 

three decades in number and size and in comparison to federal revenue, 

spending, and the economy, and (2) the amount of progress that has been 

made since 1994 in how the Executive Branch scrutinizes tax expenditures.

This update draws on our previously issued work on tax expenditure 

trends and individual tax provisions as well as results-oriented 

management and performance reporting. We also reviewed relevant 

literature related to tax expenditure measurement and reporting, and 

trends in the use of tax expenditures over time. We interviewed relevant 

agency officials and tax policy experts to obtain a greater understanding of 

information gained through our literature review. To gauge trends in the 

numbers and size of tax expenditures for fiscal years 1974 to 2004, we 

relied on the Department of the Treasury’s (Treasury) annual list of tax 

expenditures and estimates for each tax expenditure of the associated 

revenue loss—the amount of revenue that the government forgoes—and 

the outlay-equivalent value—the amount of outlays required to deliver the 

2

GAO, Tax Policy: Tax Expenditures Deserve More Scrutiny, GAO/GGD/AIMD-94-122

(Washington, D.C.: June 3, 1994).
Page 3 GAO-05-690 Tax Expenditures

same after-tax income as provided through the tax expenditure.3 We added 

the tax expenditure revenue loss estimates for each fiscal year to 

approximate the total revenue forgone through tax expenditure provisions. 

While sufficiently reliable as a gauge of general magnitude, the sum of the 

individual revenue loss estimates has important limitations in that any 

interactions between tax expenditures will not be reflected in the sum. In 

addition, tax expenditure revenue loss estimates for specific provisions do 

not take into account potential behavioral responses to changes in these 

provisions on the part of taxpayers, and, in turn, no potential behavioral 

response would be reflected in the sum of the estimates. Thus, the revenue 

loss from all or several tax expenditures together might be greater or less 

than the sum of the estimated revenue losses from the individual tax 

expenditures, and no measure of the size or the magnitude of these 

potential interactions or behavioral responses to all or several tax 

expenditures is available. Growth in the sum of tax expenditure estimates 

across the three-decade period is presented in inflation-adjusted 2004 

dollars and measured relative to the economy as a share of the gross 

domestic product (GDP). We compared the sum of tax expenditure outlayequivalent estimates to total federal mandatory and discretionary spending 

and spending by budget function. Finally, we used Treasury’s estimates to 

examine trends in the size of tax expenditures by taxpayer group and 

identify the largest tax expenditures in 2004. 

To examine progress over the last decade in how the federal government 

scrutinizes tax expenditures, we examined actions taken by the Executive 

Branch to implement our 1994 recommendations for (1) presenting tax 

expenditures in the annual budget, (2) developing a structure for 

conducting reviews of tax expenditures’ performance, (3) conducting case 

studies to assess performance review structure, and (4) incorporating tax 

expenditures into the annual budgetary review process. We reviewed 

efforts to include tax expenditures under the Government Performance 

and Results Act’s (GPRA) statutory framework for strategic planning, 

3

We used revised estimates, which incorporate the most recent changes in tax policy and 

economic activity, developed by the U.S. Department of the Treasury and reported in each 

year’s budget in either the Special Analyses, Appendixes, or Analytical Perspectives. We 

chose the tax expenditure estimates reported in the budget for our analysis because 

Treasury develops (1) revised estimates based on changes in tax policy and economic 

activity for the year prior to the reported fiscal budget year and (2) outlay-equivalent 

estimates that facilitate comparison to federal spending. Although they are the last 

available estimates reported, Treasury’s estimates are still projected estimates and may not 

reflect additional policy changes.
Page 4 GAO-05-690 Tax Expenditures

performance measurement, and program reporting and evaluation.4 We 

also considered any related activities to include tax expenditures under 

OMB’s Program Assessment Rating Tool (PART)—its current framework 

for assessing the performance of federal programs. (See app. I for details 

on our scope and methodology.)

Our work was conducted from August 2003 through July 2005, in 

accordance with generally accepted government auditing standards. In 

July 2005, we requested comments on a draft of this report from the 

Director of the Office of Management and Budget, the Secretary of the 

Department of the Treasury, and the Commissioner of the Internal Revenue 

Service (IRS). We received comments from OMB’s Associate Director for 

Economic Policy in a letter dated September 2, 2005 (see app. II). Treasury 

did not provide separate comments, instead deferring to OMB. IRS staff 

provided a technical correction that we incorporated.

Results in Brief Whether gauged in absolute numbers and revenues forgone or in 

comparison to federal spending or the size of the economy, tax 

expenditures have represented a substantial commitment of federal 

support over the past three decades. Between 1974 and 2004, tax 

expenditures doubled in number from 67 to 146, and while some were 

repealed or allowed to expire, considerably more were added to Treasury’s 

list. Based on our analysis of Treasury’s estimates, the sum of revenue loss 

estimates associated with tax expenditures, adjusted for inflation, tripled 

from approximately $240 billion to nearly $730 billion over the period.5

 The 

14 largest tax expenditures, headed by the largest single tax expenditure—

the income tax exclusion for employer-provided health care—accounted 

for 75 percent of the aggregate revenue loss in fiscal year 2004. The sum of 

the revenue loss estimates for tax expenditures that are used by individual 

taxpayers increased in real terms from approximately $190 billion to nearly 

$650 billion. Since 1981 when outlay-equivalent estimates were first 

available, the sum of the outlay-equivalent estimates for tax expenditures 

has been similar in magnitude to discretionary spending, and this sum 

4

Pub. L. No. 103-62, Aug. 3, 1993.

5

Aggregate tax expenditure estimates must be interpreted carefully because of inherent 

limitations in the meaning of the summed estimates. The sum of the individual tax 

expenditure estimates is useful for gauging the general magnitude of revenue forgone 

through provisions of the tax code but does not take into account interactions between 

individual provisions. 
Page 5 GAO-05-690 Tax Expenditures

exceeded total discretionary spending for most years during the last 

decade. As a share of the U.S. economy, the sum of tax expenditure outlayequivalent estimates remained relatively stable at about 7.5 percent of GDP 

since the last major tax reform legislation in 1986. Across budget 

functions, the size of tax expenditures varied, and for some budget 

functional areas, such as housing and education, tax expenditures were the 

same magnitude as, or larger than, federal spending.

Although tax expenditures are substantial in size, little progress has been 

made in the Executive Branch to increase the transparency of and 

accountability for tax expenditures. The entire set of tools the federal 

government can use to address national objectives—including 

discretionary and mandatory spending, tax provisions, and loans and loan 

guarantees—should be subject to periodic reviews and reexamination to 

ensure they are achieving their intended purposes and designed in the most 

efficient and effective manner. The nation’s current and projected fiscal 

imbalance serves to reinforce the importance of engaging in such a review 

and reassessment. Tax expenditures may not always be efficient, effective, 

or equitable and, consequently, information on these attributes can help 

policymakers make more informed decisions as they adapt current policies 

in light of our fiscal challenges and other overarching trends. In addition, 

some tax expenditures, at least as currently designed, may serve to 

exacerbate other key private sector and public policy challenges, such as 

controlling health care costs. Although data and methodological 

challenges may impede studies of some tax expenditures, periodic reviews 

of tax expenditures could help establish whether these programs are 

relevant to today’s needs; if so, how well tax expenditures have worked to 

achieve their objectives; and whether the benefits from particular tax 

expenditures are greater than their costs. Over the past decade, however, 

the Executive Branch has made little progress in integrating tax 

expenditures into the budget presentation, in developing a structure for 

evaluating the performance of tax expenditures, or in incorporating tax 

expenditures under review processes that apply to spending programs, as 

we recommended in 1994. Also, more recently, OMB has not used its PART 

process to systematically review tax expenditures and promote joint and 

integrated reviews of tax and spending programs sharing common, 

crosscutting goals. One of the key impediments to moving forward in 

evaluating tax expenditures’ performance is the continuing lack of clarity 

about the roles of OMB, Treasury, IRS, and departments or agencies with 

outlay program responsibilities.
Page 6 GAO-05-690 Tax Expenditures

We are recommending that the Director of OMB, in consultation with the 

Secretary of the Treasury, take several steps to ensure greater transparency 

of and accountability for tax expenditures by reporting better information 

on tax expenditures’ performance and more fully incorporating tax 

expenditures into federal performance management and budget review 

processes.

In providing comments on a draft of this report, OMB's Associate Director 

for Economic Policy disagreed with our recommendations, raised concerns 

about our use of tax expenditure estimates developed by Treasury and 

reported in the annual federal budget, and implied that increasing the 

attention paid to tax expenditures due to the severity of the nation’s longterm fiscal imbalance would lead to tax increases. Pursuant to the 

Congressional Budget Act of 1974, the term tax expenditure, as our draft 

stated, has been used in the federal budget for three decades, and the tax 

expenditure concept—while not precisely defined—is a valid 

representation of one tool that the federal government uses to allocate 

resources. In addition, OMB's implication that focusing more attention on 

tax expenditures would automatically lead to increased taxes is 

unfounded. Our report states that the revenues forgone through tax 

expenditures reduce revenues available to fund other federal activities or 

they require higher tax rates to obtain a given amount of revenue. Thus, if 

the evaluations of tax expenditures we call for lead to reducing or 

eliminating some tax expenditures, the net change after rate adjustments 

could, depending on overall congressional priorities and preferences, result 

in tax reductions for many taxpayers. Furthermore, although specific tax 

expenditures, such as the earned income tax credit (EITC) and Liberty 

Zone tax benefits, have received varying degrees of scrutiny, efforts to date 

have not provided the Congress and others with an integrated perspective 

on the extent to which programs and tools—including tax expenditures—

contribute to national goals and position the government to successfully 

meet 21st century demands. The lack of a requirement to disclose tax 

expenditures in agencies’ annual performance and accountability reports 

may result in important performance and cost related data not being fully 

considered with other federal resources allocated to achieve similar 

objectives. Although challenges must be overcome to provide systematic 

reviews of tax expenditures, these challenges cannot be addressed absent 

effective leadership within the Executive Branch. For these reasons, we 

believe our recommendations, if fully implemented, will ensure that 

policymakers and the public have the necessary information to make 

informed decisions and to improve the progress toward greater scrutiny of 

tax expenditures.
Page 7 GAO-05-690 Tax Expenditures

Background To understand the trends in the size of tax expenditures, it is helpful to 

understand how tax expenditures are defined and how the different types 

affect taxpayer liability. For this report, we also provide an overview of the 

broad purposes of tax expenditures—one method the federal government 

can use to achieve national objectives—and a discussion of how tax 

expenditures interact with the federal budget.

Tax Expenditures Defined Tax expenditures are 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. These provisions may, in effect, be viewed as 

spending programs channeled through the tax system and are classified in 

the U.S. budget by the same functional categories as other spending, such 

as energy and health. Tax expenditures are provisions that are exceptions 

to the “normal structure” of the individual and corporate income tax 

necessary to collect government revenues.6

 Deciding whether an 

individual 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 income tax base.7 As 

a practical matter, the term tax expenditure has been used in the federal 

budget for three decades, and the tax expenditure concept—while not 

precisely defined—is a valid representation of one tool that the federal 

government uses to allocate resources.

Both the congressional Joint Committee on Taxation (JCT) and Treasury’s 

Office of Tax Analysis annually compile a list of tax expenditures and 

estimates of their cost.8

 (App. III provides additional information on how 

6

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

exist for other types of taxes such as excise and payroll taxes; however, this report 

considers only tax expenditures for the federal income tax system.

7

Some object that the distinction between those tax provisions labeled tax expenditures and 

those that are not is arbitrary and, that the very notion of labeling these provisions 

expenditures implies that all income could be taxed and thus, all income inherently belongs 

to the government. See, for example, Joint Economic Committee, Tax Expenditures: A 

Review and Analysis (Washington, D.C.: August 1999).

8

Office of Management and Budget, Analytical Perspectives, Budget of the United States 

Government, Fiscal Year 2006 (Washington, D.C.: 2005); and Joint Committee on Taxation,

Estimates of Federal Tax Expenditures for Fiscal Years 2005-2009, JCS-1-05, (Washington, 

D.C.: Jan. 12, 2005).
Page 8 GAO-05-690 Tax Expenditures

tax expenditures are measured and reported and perspective on 

differences among the lists of tax expenditures reported by JCT and 

Treasury.) Treasury’s tax expenditure estimates are included as an 

informational supplement to the annual federal budget by the OMB. The 

revenue loss is estimated for each tax expenditure separately by comparing 

the revenue raised under current law with the revenue that would have 

been raised if the single provision did not exist, assuming all other parts of 

the tax code remain constant and taxpayer behavior is unchanged. 

Revenue loss estimates are intended to provide information about the value 

of tax expenditures. However, tax expenditure estimates do not 

incorporate any behavioral responses and thus do not necessarily 

represent the exact amount of revenue that would be gained if a specific 

tax expenditure were repealed.9

 For example, when the consumer interest 

deduction was phased out gradually beginning in 1987, some taxpayers 

shifted to interest-deductible home equity loans to finance consumption, 

thereby affecting the revenue gain from eliminating the consumer interest 

deduction.

In addition to estimating revenue loss, Treasury also measures tax 

expenditures on an outlay-equivalent basis. Outlay-equivalent estimates 

represent the amount of budget outlays that would be required if the 

government were to provide taxpayers with the same after-tax income they 

receive through the tax expenditure. Outlay-equivalent estimates are often 

higher than revenue loss estimates to reflect that a comparable outlay 

program could result in additional taxable income to recipients.10 Outlayequivalent estimates are useful to compare tax expenditures and other 

parts of the federal budget. For example, the outlay-equivalent estimate for 

the tax exclusion for housing and meal allowances for military personnel 

reflects the additional pretax income that military personnel would have to 

be paid to raise their income after federal taxes by the amount of the tax 

expenditure. The outlay-equivalent estimate can be used to compare this 

tax expenditure with other outlays for defense compensation on a more 

consistent basis.

9

Changes in taxpayer behavior are taken into account when JCT and Treasury prepare 

revenue estimates for proposed legislation.

10Although outlay-equivalent estimates are often higher than revenue loss estimates, the net 

estimated revenue loss for the government is unchanged. For more information on how 

outlay-equivalent estimates are measured, see app. III.
Page 9 GAO-05-690 Tax Expenditures

Types of Tax Expenditures The Congressional Budget and Impoundment Control Act of 197411 lists six 

types of tax expenditures: exclusions, exemptions, deductions, credits, 

preferential tax rates, and deferral of tax liability. Some tax expenditures 

apply only to individual taxpayers, such as deductions and exclusions for 

employer-provided contributions for medical insurance, and some only to 

corporate taxpayers, such as a tax credit for corporations doing business in 

U.S. possessions. Other tax expenditures, such as accelerated 

depreciation, apply both to corporations and to individual taxpayers with 

income from businesses such as sole proprietorships or partnerships.12 

Table 1 shows examples of each type of tax expenditure and the taxpayer 

group that may claim a particular type.

11Pub. L. No. 93-344, Sec. 3, 88 Stat. 299 (July 12, 1974) (codified at 2 U.S.C. sec. 622(3)).

12Tax expenditures have been described by some analysts as being directed toward social or 

business interests. A social tax expenditure provides transfer payments related to old age, 

education, occupational and health benefits. A business tax expenditure has as its central 

goal the provision of financial support to corporations, partnerships, or individuals in any 

industry. See Eric Toder, The Changing Composition of Tax Incentives: 1980-99, 

(Washington, D.C.: The Urban Institute, March 1999).
Page 10 GAO-05-690 Tax Expenditures

Table 1: Examples of Types of Tax Expenditures Available to Taxpayer Groups

Source: GAO. 

a

Types of tax expenditures that are identified in the U.S. Congressional Budget and Impoundment Act 

of 1974.

b Individual tax expenditures include those available to non-corporate forms of business such as sole 

proprietorships.

Figure 1 illustrates how tax expenditures appear on the U.S. Individual 

Income Tax Return (Form 1040). Exclusions are those items of income 

that would otherwise constitute a part of the taxpayer’s gross income, but 

are excluded under a specific provision of the tax code. Exclusions 

generally do not appear on the Form 1040, and excluded income is not 

reflected in total reported income. For example, the income tax exclusion 

of employer contributions to medical insurance premiums and medical 

care is not reported in a taxpayer’s wages or salaries. An exemption, such 

as the parent personal exemption for students over age 19 but under age 24, 

is a reduction in taxable income offered to taxpayers because of their 

status or circumstances. Deductions are adjustments from adjusted gross 

income.13 Deductions claimed before the adjusted gross income line on the 

Form 1040, such as the tuition and fees deduction (this appears on line 27 

in fig. 1), are sometimes called “above-the-line” deductions. Taxpayers may 

Taxpayer groups

Types of tax expendituresa Individual taxpayersb Corporate taxpayers

Both corporate and 

individual taxpayers

Exclusion from taxable income Exclusion of employer 

contributions to medical insurance 

premiums and medical care

Extraterritorial income exclusion Exclusion of interest on 

public purpose state and 

local bond

Exemption from taxable income Parent personal exemption for 

student age 19 and over

Exemption of credit union income Special employer stock 

ownership plan rules

Deduction from taxable income Deductibility of mortgage interest 

on owner-occupied homes 

Special Blue Cross/Blue Shield 

deduction

Deductibility of charitable 

contributions 

Credit subtracted from taxes 

ordinarily computed

Child tax credit Employer-provided child care 

credit 

Credit for low-income 

housing investments

Preferential tax rate for all or 

part of taxable income

Averaging previous period taxable 

income for farmers

Graduated corporation income tax 

rate

N/A

Deferral of tax liability Carryover basis of capital gains on 

gifts

Deferral of income from controlled 

foreign corporations

Accelerated depreciation of 

machinery and equipment

13Adjusted gross income is equal to gross income less qualifying adjustments to income, 

including some deductions.
Page 11 GAO-05-690 Tax Expenditures

also claim “below-the-line” deductions after the adjusted gross income line; 

to do so, taxpayers must itemize their deductions.14

14Taxpayers list their itemized deductions on the U.S. Individual Income Tax Return Form 

1040 Schedule A—Itemized Deductions. In 2001, we reported that less than one-third of 

individual taxpayers itemize their deductions; in lieu of itemizing their deductions, most 

taxpayers take the standard deduction,which is considered part of the individual income 

tax structure. See GAO, Tax Deductions: Estimates of Taxpayers Who May Have Overpaid 

Federal Taxes by Not Itemizing, GAO-01-529 (Washington, D.C.: Apr. 12, 2001).
Page 12 GAO-05-690 Tax Expenditures

Figure 1: Examples of How Each Type of Tax Expenditure Relates to the U.S. Individual Income Tax Return (Form 1040)

Exclusion

Excluded income generally does not 

appear on the tax form, but can still 

cause the income line to be lower 

than it otherwise would be. For 

example, the exclusion of employer 

contributions to medical insurance 

premiums and medical care causes 

the reported amount of wages and 

salaries to be less than it would be 

otherwise (see line 7).

Exemption

An example of an exemption is the 

parent personal exemption for 

students over age 19 but under age 

24 (appears on line 6c).

Deferral

An example of a deferral is the 

accelerated depreciation of 

machinery and equipment for a 

sole proprietorship (appears on 

line 12 via Schedule C–Profit or 

Loss from Business and Form 

4562–Depreciation and 

Amortization.

Preferential tax rate

An example of this tax expenditure 

type is the preferential tax rate on 

capital gains of certain income 

(appears on line 13 via the 

Schedule D–Capital Gains and 

Losses form).

Deduction 

An example of a deduction above the 

adjusted gross income line is the tuition 

and fees deduction (appears on 

line 27). An example of an itemized 

deduction below-the-line is the deduction 

for mortgage interest on owner-occupied 

homes (appears on line 39 as an 

itemized deduction via the Schedule 

A–Itemized Deductions form).

Note: Adjusted gross income is equal to 

gross income less qualifying adjustments to 

income, including some deductions.
Page 13 GAO-05-690 Tax Expenditures

Credit

An example of a credit is the tax credit for 

the elderly or disabled (appears on line 48). 

An example of a refundable credit is the 

child tax credit (appears on line 51 with the 

refundable portion on line 67 via Form 

8812–Additional Child Tax Credit).

Source: GAO.
Page 14 GAO-05-690 Tax Expenditures

Each type of tax expenditure creates tax savings in different ways and, 

consequently, reduces federal revenues in different ways. 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.15 Generally, the 

higher the taxpayer’s marginal tax rate, the greater the tax savings from 

these tax expenditure types.16 Tax credits reduce tax liability dollar-fordollar, so the value of a credit is the same regardless of the taxpayer’s 

marginal tax rate. A nonrefundable tax credit can be used to reduce 

current year tax liability to zero, and a refundable credit in excess of tax 

liability results in a cash refund. For preferential tax rates which reduce 

the tax rate on some forms of income such as capital gains, the tax savings 

depend on the difference between the preferential rate and a taxpayer’s 

marginal tax rate. By allowing taxpayers to reduce current tax liability by 

delaying recognition of some income or accelerating some deductions 

otherwise attributable to future years, a tax deferral shifts the timing of tax 

payments and, in effect, provides an interest-free “loan” to the taxpayer. 

The benefit from a deferral is even greater if the taxpayer expects to face a 

lower tax bracket in the future. A lower-income taxpayer—with no net 

annual income or with no current tax liability after claiming the standard 

deduction and any personal exemptions—would not directly benefit from 

most tax expenditures other than refundable credits.

Some techniques have been used to limit the benefits that taxpayers may 

receive from individual tax expenditures or groups of them. Congress has 

controlled the amount of revenue forgone for some tax expenditures by 

adopting provisions to restrict taxpayers’ eligibility for benefits. For 

example, the mortgage interest deduction is limited to interest on debt up 

to $1 million to buy, build, or improve first and second homes and up to 

$100,000 in home equity debt. Aggregate itemized deductions are reduced 

by 3 percent of the amount of a taxpayer’s adjusted gross income that 

exceeds a certain threshold, eliminating 3 cents of itemized deductions for 

each dollar of income above the threshold for higher-income taxpayers.17 

Some tax expenditures, such as tax-exempt private-activity bonds issued 

by each state, are subject to volume caps limiting the aggregate amount of 

15A marginal tax rate is the tax rate that applies to an additional dollar of income.

16Marginal individual tax rates for 2004 taxes were 10 percent, 15 percent, 25 percent, 28 

percent, 33 percent, and 35 percent.

17The reduction in itemized deductions for higher-income taxpayers may also be viewed as a 

hidden tax rate.
Page 15 GAO-05-690 Tax Expenditures

benefits available. The alternative minimum tax (AMT) also affects tax 

expenditures and the amount of the revenue loss for the federal 

government.18 The AMT is intended to ensure that taxpayers with income 

over certain thresholds pay some income tax, no matter how much they 

claim in certain deductions and credits. Under the AMT, taxpayers may 

have to add back some tax expenditures that they could otherwise claim 

under the regular tax system, such as deductions for state and local taxes 

and home equity loan interest, and they may have to include as income 

certain tax-exempt bond interest that is excluded under the regular tax 

system.

Objectives of Tax 

Expenditures

In addition to raising revenue, the federal income tax has long been used as 

a tool for accomplishing social and economic objectives. The general 

objectives of tax expenditures are to encourage particular types of 

activities (such as saving for retirement, promoting home ownership, 

investing in certain sectors, or funding research and development) and 

provide economic relief to selected groups of taxpayers (such as the 

elderly, the blind, and those with children). Another objective of tax 

expenditures may also be to adjust for differences in individuals’ ability to 

pay taxes. For example, if two taxpayers have the same income, but one 

has a catastrophic illness and costly medical bills (or large casualty and 

theft losses), the other taxpayer is judged better able to pay income taxes. 

Some tax expenditures may be enacted to compensate for other provisions 

of the tax code. For example, advocates of reduced tax rates on capital 

gains often explain the special treatment of capital gains income as 

offsetting, in part, the assessment of taxes on the nominal, rather than the 

real, value of capital gains. The rationale and reasons for a particular tax 

expenditure may change over time. For example, according to the 

Congressional Research Service (CRS), the income tax code instituted in 

1913 contained a deduction for all interest paid. No distinction was made 

between business and personal interest expenses, although most interest 

payments at that time represented business expenses. The legislative 

history does not indicate that the deductibility of mortgage interest was 

originally intended to encourage home ownership or subsidize the housing 

industry. However, over time, encouraging home ownership, stimulating 

18The AMT is a separate tax system that applies to both individual and corporate taxpayers. 

It parallels the regular individual income tax system but with different rules for determining 

taxable income, different tax rates for computing tax liability, and different rules for 

allowing the use of tax credits.
Page 16 GAO-05-690 Tax Expenditures

residential construction and maintenance, and encouraging families to save 

and invest in a major financial asset have all been offered as justifications 

for the mortgage interest deduction.19

The tax expenditure tool may substitute for a federal spending program in 

that the federal government “spends” some of its revenue on subsidies by 

forgoing taxation on some income.20 Certain activities may be cheaper and 

simpler to subsidize through the tax code than by setting up a separate 

program using a different tool. 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. The administrative infrastructure 

already exists for the government to collect and remit money to over 131 

million individual tax filers and 6 million corporations via the tax system 

administered by the IRS. In concept, the costs to implement an incomebased benefit program through the existing tax system could be lower than 

to set up separate spending programs to deliver these benefits.

In some circumstances, tax expenditures may not be the best policy choice 

to deliver timely benefits or reach intended populations. For programs that 

seek to provide benefits within a given year, the annual income measure 

relevant for income tax purposes may not be the best way to target 

benefits. Relative to spending programs, tax expenditures are limited in 

their ability to directly provide benefits to nontaxpayers. For example, tax 

credits must be refundable to reach low-income individuals who do not pay 

taxes and otherwise would not be required to file tax returns. Tax 

expenditures generally do not deliver federal resources directly to state 

and local governments and tax-exempt nonprofit organizations. The 

charitable contribution deduction provides an incentive for individual and 

corporate taxpayers to donate to charitable, religious, educational, and 

19For more information on the history of the mortgage interest deduction, see Pamela J. 

Jackson, Fundamental Tax Reform: Options for the Mortgage Interest Deduction, Library 

of Congress, Congressional Research Service Report RL33025 (Washington, D.C.: Aug. 8, 

2005).

20For more discussion of administering programs using tax expenditures, see OMB, 

Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006

(Washington, D.C.: 2005); Eric J. Toder, "Tax Cuts or Spending—Does It Make a Difference?" 

National Tax Journal, Vol. LIII, No. 3, September 2000); and Joel Slemrod and Jon Bakija, 

Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes, 3rd Edition (Cambridge, 

Mass.: The MIT Press, 2004).
Page 17 GAO-05-690 Tax Expenditures

health nonprofit organizations. The deduction, in effect, is a federal grant 

to the donor that reduces the out-of-pocket cost of giving. The itemized 

deduction for state and local taxes directly increases an individual 

taxpayer's after-tax income and thus reduces the after-tax price of state and 

local taxes. State and local governments receive some of the benefit to the 

extent that taxpayers may be more willing to pay state and local taxes.

Tax expenditures are not necessarily an either/or alternative to federal 

spending and may be used in combination with federal spending and 

strategies to achieve national objectives. For example, the HOPE and 

Lifetime Learning tax credits are used with federal education assistance, 

such as student loans, all of which help individuals fund higher education. 

Many tax expenditures are comparable to entitlement programs for which 

spending is determined by rules for eligibility, benefit formulas, and other 

parameters rather than by Congress appropriating specific dollar amounts 

each year.21 With some exceptions, tax expenditures typically make funds 

(through reduced taxes) available to all qualified claimants, regardless of 

how many taxpayers claim the tax expenditures, how much they claim 

collectively, or how much federal revenue is reduced by these claims. 

Some tax expenditures resemble other policy tools, such as grants or direct 

loans. A few tax expenditures are administered like grant programs, 

allowing for some administrative discretion over who receives funds. For 

the New Markets Tax Credit (NMTC), those seeking the credit must apply 

to the Community Development Financial Institutions (CDFI) Fund within 

Treasury and be chosen by a group of evaluators to receive the tax credit. 

Like a grant program, the NMTC has a maximum amount that can be 

allocated by CDFI.22 Tax expenditures in the form of deferrals resemble 

loans, because they allow taxpayers to postpone the time when income is 

recognized for tax purposes or to accelerate the deduction of expenses, 

both of which effectively lower the amount of income currently subject to 

tax. Deferrals can result in higher taxes in later years when taxpayers 

recognize deferred income in later tax years or have fewer deductions to 

claim than they otherwise would have had; the amount of the deferral is, in 

effect, analogous to a government loan.

21Entitlement statutes provide the authority to make payments to any person or government 

if, under the provisions of the law containing that authority, the United States is obligated to 

make such payments to persons or governments who meet the requirements established by 

that law.

22The NMTC legislation limits the allocation of equity eligible for tax credits from 2001 

through 2007 from $1 billion to $3.5 billion per year, totaling $15 billion over the 7 years.
Page 18 GAO-05-690 Tax Expenditures

Tax Expenditures and the 

Federal Budget

Tax expenditures, by definition, reduce federal revenue and thus have 

implications for income tax rates, federal spending, and the federal budget. 

To obtain a given amount of revenue, tax expenditures require overall 

statutory tax rates to be higher. Otherwise, revenues forgone through tax 

expenditures reduce the revenue base available for funding federal 

spending programs. From a budgetary perspective, most tax expenditures 

are comparable to mandatory spending for entitlement programs, in that no 

further action is required to provide resources for tax expenditures. Tax 

expenditures do not compete overtly in the annual budget process and, in 

effect, receive a higher funding priority than discretionary spending subject 

to the annual appropriations process. Revenues forgone through tax 

expenditures—unless offset by increased taxes or lower spending—

increase the unified budget deficit and federal borrowing from the public 

(or reduce the unified budget surplus available to reduce debt held by the 

public).

As noted previously, both the executive and legislative branches—by 

Treasury and JCT, respectively—publish annual lists of tax expenditures 

and the associated revenue loss, but budgetary decisions generally are not 

based on these lists. Like any spending program, newly proposed tax 

expenditures and those subject to expiration, to some extent, are subject to 

scrutiny, but most tax expenditures are not subject to reauthorization. Tax 

expenditures may be indirectly controlled to the extent that the Congress 

aims to achieve any revenue target. The tax committees consider tradeoffs 

between tax expenditures, tax rates, and other parts of the tax code.

In concept, eliminating or limiting an existing tax expenditure—like an 

existing spending program—would free up resources to reduce tax rates, 

increase federal spending or other tax expenditures, reduce the deficit, or 

produce some combination thereof. Conversely, adding a new tax 

expenditure, expanding an existing tax expenditure, or extending an 

expiring tax expenditure reduces the resources available to reduce tax 

rates, fund federal spending and tax expenditures, or reduce the deficit. 

The overall effect on the unified budget position would depend on the 

extent to which any change in tax expenditures is offset by adjustments to 

the tax code or other spending programs. 
Page 19 GAO-05-690 Tax Expenditures

Tax Expenditures Have 

Represented a 

Substantial Federal 

Commitment over 

Time

Whether gauged in absolute numbers, by revenues forgone, or in 

comparison to federal spending or the size of the economy, tax 

expenditures have been substantial over the last three decades. Between 

fiscal years 1974 and 2004, tax expenditures doubled in number, and the 

sum of estimated revenue losses associated with tax expenditures tripled, 

most of which was accounted for by tax expenditures that were used by 

individual taxpayers. Since 1981 when outlay-equivalent estimates were 

first available, the sum of the outlay-equivalent estimates for tax 

expenditures has been similar in magnitude to discretionary spending, and 

this sum exceeded total discretionary spending for most years during the 

last decade. As a share of the U.S. economy, the sum of tax expenditure 

outlay-equivalent estimates remained relatively stable at about 7.5 percent 

of GDP since the last major tax reform legislation.

Sums of Tax Expenditure 

Estimates Are Useful for 

Gauging Magnitude of Tax 

Spending but Need to Be 

Interpreted Carefully

Summing the individual tax expenditure estimates is useful for gauging the 

general magnitude of the federal revenue involved, but it does not take into 

account possible interactions between the individual tax code provisions. 

Because of this limitation, sums of tax expenditure estimates must be 

interpreted carefully. The JCT and Treasury estimate the revenue loss from 

each tax expenditure separately, assuming that the rest of the tax code 

remains unchanged. Neither JCT nor Treasury adds tax expenditure 

estimates, because summing them does not take into account possible 

interaction effects among the provisions. If two or more tax expenditures 

were estimated simultaneously, the total change in federal revenue could 

be smaller or larger than the sum of the amounts shown for each item 

separately as a result of interactions among the tax expenditure provisions. 

For example, the repeal of an itemized deduction tax expenditure might 

cause more taxpayers to take the standard deduction instead of itemizing. 

However, the revenue loss estimate for any single tax expenditure among 

the itemized deductions does not reflect this potentially sizeable 

interaction with the standard deduction. Eliminating several itemized 

deductions at the same time could cause significant numbers of taxpayers 

to take the standard deduction, and thus, the decrease in revenue could be 

less than the sum of the estimated revenue loss estimates for each itemized 

deduction. To demonstrate the magnitude of possible interactions and the 

potential implications for summing tax expenditures, Treasury’s Office of 
Page 20 GAO-05-690 Tax Expenditures

Tax Analysis illustrated for us the repeal of five itemized deductions.23 

Based on tax year 2002 data, the sum of the five separate tax expenditure 

estimates, each calculated assuming the rest of the tax code was 

unchanged, was over $175 billion.24 Assuming the simultaneous repeal of 

all five provisions, Treasury estimated the revenue loss after interaction 

totaled $131 billion—about 25 percent less than the sum of the separate 

estimates. According to Treasury, this example cannot be generalized 

given that some groups of tax provisions have substantial interactions and 

others do not. For all tax expenditures, the magnitude of the difference 

between the sum of the estimates and an estimate for all tax expenditures 

simultaneously is not known.

Additionally, tax expenditure estimates developed by Treasury and JCT do 

not take into account possible behavioral responses by taxpayers if a tax 

expenditure were repealed. For example, if the HOPE scholarship tax 

credit—a tax credit for the first 2 years of post-secondary education—were 

eliminated, taxpayers who would have used that tax credit may instead opt 

for the Lifetime Learning tax credit or other tax subsidies aimed at higher 

education. In contrast, certain kinds of behavioral responses, such as 

changes in the timing of transactions, income recognition, or shifts 

between sectors of the economy, are taken into account when JCT and 

Treasury prepare revenue estimates for proposed legislation. Potential 

macroeconomic effects, such as changes to GDP, are not reflected in tax 

expenditure revenue loss estimates or in revenue estimates for proposed 

legislation.

To some extent, the same kinds of challenges in interpreting tax 

expenditure estimates also exist in projecting the costs of spending 

programs. Budget line items generally do not reflect the actual budget 

savings to be gained by abolishing specific programs or groups of 

programs. For instance, eliminating all veterans’ benefits would reduce the 

federal budget by less than the amount currently spent on those programs 

because spending likely would increase in food stamps, Medicaid, and 

other entitlement programs. Although interaction effects also occur for 

23The 2002 estimates for the five itemized deductions were: (1) charitable contributions, 

$33.8 billion; (2) home mortgage interest expenses, $69.2 billion; (3) state and local income 

taxes, $43.0 billion; (4) state and local property taxes, $24.2 billion; and (5) medical 

expenses, $5.5 billion.

24The sum of Treasury’s 2004 revenue loss estimates for the five itemized deductions was 

about $168 billion; see app. III.
Page 21 GAO-05-690 Tax Expenditures

spending programs, Treasury officials responsible for developing tax 

expenditure estimates told us that the bias in summing tax expenditure 

revenue loss estimates likely is greater than the bias for outlay projections. 

Whereas historical data are reported for federal budget receipts and 

outlays, the last available values for tax expenditures remain estimates. 

Treasury’s last reported re-estimates for past fiscal years reflect legislation 

enacted, prevailing economic conditions, and the latest taxpayer data 

available at the time of estimation.25 Projections of the future costs of tax 

expenditures are more uncertain than projections for future tax receipts or 

outlays because it is not known with certainty, even after the fact, how 

much was spent for any given tax expenditure.

Despite the limitations in summing separate tax expenditure revenue loss 

and outlay-equivalent estimates, these are the best available data to 

measure the value of tax expenditures and make comparisons to other 

spending programs. Summing the estimates provides perspective on the 

use of tax expenditures as a policy tool and represents a useful gauge of the 

general magnitude of government subsidies carried out through the tax 

code. The estimates also can be used to compare tax expenditures to 

federal spending overall and by budget function. Other researchers also 

have summed tax expenditure estimates to help gain perspective on the use 

of this policy tool and examine trends in the aggregate growth of tax 

expenditure estimates over time.26

Tax Expenditures Have More 

Than Doubled in Number and 

Tripled in Size

Between 1974 and 2004, tax expenditures reported by Treasury more than 

doubled in overall number from 67 to 146, and while some were dropped, 

considerably more were added. For 1974, Treasury listed 67 separate 

exclusions, exemptions, deductions, credits, preferential tax rates, and 

25Treasury’s fiscal year 2004 re-estimates were published in February 2005, still months 

before 2004 tax returns would be filed. JCT projects the revenue loss for future years and 

does not re-estimate tax expenditures for past fiscal years.

26See for example: Eric Toder, The Changing Composition of Tax Incentives: 1980-1999. 

(Washington, D.C.: The Urban Institute, 1999); Dhammika Dharmapala, Tax Expenditures 

Versus Direct Subsidies: A Review of the Issues. (Austin, Tex.: National Tax Association, 

91st Annual Conference, 1998); Christopher Howard, “Tax Expenditures,” The Tools of 

Government: A Guide to the New Governance, edited by Lester M. Salamon (New York, 

N.Y.: Oxford University Press, 2002), pp. 410-444; Congressional Research Service, 

Overview of the Federal Tax System (Washington, D.C.: 2005).
Page 22 GAO-05-690 Tax Expenditures

deferral of tax liability as tax expenditures.27 In 1986, Treasury reported 115 

tax expenditures, and by 2004 Treasury’s list grew to 146 tax expenditures. 

Figure 2 shows the rise of the overall number of tax expenditures over the 

last three decades. (App. IV contains a compilation of all tax expenditures 

reported by Treasury between 1974 and 2004.)

Figure 2: Number of Tax Expenditures Reported by Treasury, 1974-2004

Note: The number of tax expenditures reflects all provisions reported by Treasury, including those 

enacted but effective for future fiscal years. For example, Treasury's last available list included eight 

new tax expenditures enacted in 2004 that will be effective in fiscal year 2005 and later. In addition, 

fluctuations in the trend lines from year-to-year may reflect changes in OMB’s methodology. For 

example, the exclusion of scholarship and fellowship income and several other tax expenditures were 

excluded for fiscal year 1982, but included in prior and post years, because of changes in Treasury’s 

income tax baseline that defines a tax expenditure.

Of the 146 tax expenditures listed by Treasury in the President’s fiscal year 

2006 budget, 32 percent were on the first list in 1974, 23 percent were added 

between 1975 and 1986, and 45 percent were added since 1986. Figure 3 

shows the duration of tax expenditures listed by Treasury. Of the 67 tax 

expenditures listed in 1974, 21 had been dropped over the period, leaving 

27The revenue loss estimates for fiscal year 1974 were reported in the President’s Budget for 

fiscal year 1976, published in 1975. The list has been required by the Congressional Budget 

Act of 1974 in the budget thereafter.

Fiscal year

Number

Source: GAO analysis of OMB budget reports on tax expenditures, Fiscal Years 1976-2006.

19741975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

0

20

40

60

80

100

120

140

160
Page 23 GAO-05-690 Tax Expenditures

46 remaining on the list in 2004. Since 1974, 143 tax expenditures were 

added to Treasury’s list, although 43 of them have since dropped from the 

list over the period. Of the 100 added since 1974 and still reported in fiscal 

year 2004, 66 were first reported for 1986 or later.
Page 24 GAO-05-690 Tax Expenditures

Figure 3: Duration of Tax Expenditures Reported by Treasury, 1974-2004 

Note: The number of tax expenditures reflects all provisions reported by Treasury, including those 

enacted but effective for future fiscal years. For example, Treasury's last available list included eight 

new tax expenditures enacted in 2004 that will be effective in fiscal year 2005 and later. Fluctuations in 

Source: GAO.

Fiscal year

Duration of tax expenditures

1

1

2 5

1 1

3

3

1 2

1 5

1 2

1 1

1 1

1

1 6

1

1

1

5

1

1

1

9

1 1

1

1

1

2 1

2

1 1

5

1

1 2

1 1

7

2

1

1

2

9

1

1

1 3

1 2

1

1 1

1

6

2

2

11

3

3

1 1

5

1

1

9

46

197419751976

1977

19781979

1980

1981

1982

1983

19841985198619871988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
Page 25 GAO-05-690 Tax Expenditures

the trend lines from year-to-year may reflect changes in OMB’s methodology. For example, the 

exclusion of scholarship and fellowship income and several other tax expenditures were excluded for 

fiscal year 1982, but included in prior and post years, because of changes in Treasury’s income tax 

baseline that defines a tax expenditure.

The number of tax expenditures reported by Treasury has changed over 

time for several reasons. Some provisions expired or were repealed; others 

were merged with another tax expenditure. For example, until expiration 

on December 31, 1984, state and local governments were allowed to issue 

tax-exempt obligations to finance the purchase of mass-commuting 

vehicles for lease to government transit agencies; the Tax Reform Act of 

198628 repealed the investment tax credit; and the tax expenditure that 

provided 5-year amortization for pollution control was merged into the 

investment tax credit by the Tax Reform Act of 1976.29 Legislation also 

added new tax expenditures over time, such as the child tax credit created 

by the Taxpayer Relief Act of 1997.30 Some tax expenditures split into 

additional listings to reflect legislation expanding existing tax 

expenditures. For example, Treasury began listing the net exclusion of 

pension contributions and earnings with separate estimates for employersponsored defined-benefit and 401(k) pension plans following 2001 

legislation increasing the contribution limits for 401(k) accounts. Finally, 

changes in the baseline used by Treasury to identify tax expenditures may 

have caused some tax expenditures to drop off its list, while adding new 

tax expenditure listings.31 For example, Treasury briefly dropped the 

exclusion of scholarship and fellowship income from its fiscal year 1982 list 

because it was not considered a tax expenditure under the baseline that 

Treasury used that year.

As the overall number reported by Treasury doubled, the sum of the 

estimated revenue loss due to tax expenditures, adjusted for inflation, 

tripled from approximately $243 billion for 1974 to $728 billion for 2004.32 

Figure 4 shows the sum of Treasury’s revenue loss estimates over the past 

28Pub. L. No. 99-514, October 2, 1986.

29Pub. L. No. 94-455, October 4, 1976.

30Pub. L. No. 105-34, August 5, 1997.

31To determine the tax code provisions that satisfy the definition of a tax expenditure, the 

existing tax law must be compared or measured against an alternative set of tax rules that 

represent a baseline. App. III discusses in more detail the baselines used by Treasury as well 

as how Treasury measures and reports tax expenditures.

32The tax expenditure revenue loss estimates take into account the AMT liability.
Page 26 GAO-05-690 Tax Expenditures

three decades. From 1974 to 1986, revenue losses increased by nearly two 

and one-half times from approximately $243 billion for 1974 to $598 billion 

for 1986 (in 2004 dollars). Over the next 2 years, the sum of the revenue 

losses decreased by about 28 percent to approximately $433 billion for 

1988. From 1989 through 1997, however, revenue losses increased by 

approximately 16 percent to approximately $547 billion. From 1998 to 

2002, the sum of the estimated revenue loss increased by an average of 

about $41 billion per year, peaking at about $783 billion for 2002. The sum 

of the revenue loss estimates declined to approximately $728 billion in 

2004.

Figure 4: Sum of Tax Expenditure Revenue Loss Estimates, 1974-2004

Note: Summing the revenue loss estimates does not take into account possible interaction effects 

among the tax expenditures that we mentioned earlier in the report. Changes in economic conditions 

and estimation techniques can affect revenue loss estimates for tax expenditures, making them differ 

from year to year. Changes to the number of tax expenditures reported by Treasury would also affect 

the amount of revenue loss reported if some tax expenditures were eliminated or added. Finally, 

revenue loss estimates include the effect of certain tax credits on receipts only and not the effect of the 

credits on outlays.

0

100

200

300

400

500

600

700

800

900

Fiscal year

Dollars in billions (in constant 2004 dollars) 

Source: GAO Analysis of OMB budget reports on tax expenditures, Fiscal Years 1976-2006.

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
Page 27 GAO-05-690 Tax Expenditures

The revenue loss estimates do not reflect the outlays for the refundable 

portion for certain tax credits.33 Summing these outlays along with the sum 

of the revenue loss estimates provides a more complete picture of the 

aggregate cost of tax expenditures throughout the period, as shown in 

figure 5. The sum of the estimated revenue losses and outlays associated 

with tax expenditures totaled about $770 billion for fiscal year 2004.

Figure 5: Sum of Tax Expenditure Revenue Loss Estimates with Outlays for Refundable Tax Credits, 1974-2004

Note: Reflects refundable amounts for the EITC from 1976 to 2004, the child tax credit for 1997 to 

2004, the child insurance medical premium credit for 1992 to1993, and the tax credit for health 

insurance purchased by certain displaced and retired individuals for 2004. Summing the revenue loss 

estimates does not take into account possible interaction effects among the tax expenditures that we 

mentioned earlier in the report. Changes in economic conditions and estimation techniques can affect 

revenue loss estimates for tax expenditures, making them differ from year to year. Changes to the 

number of tax expenditures reported by Treasury would also affect the amount of revenue loss 

reported if some tax expenditures were eliminated or added. Finally, revenue loss estimates include 

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

33In fiscal year 2004, the associated outlays were $33.1 billion for the EITC, $8.9 billion for 

the child tax credit, and $0.7 billion for the health insurance tax credit for certain displaced 

and retired individuals.

0

100

200

300

400

500

600

700

800

900

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

19851986

19871988

1989

1990

1991

19921993

1994

1995

19961997

1998

1999

2000

2001

20022003

2004

Fiscal year

Dollars in billions (in constant 2004 dollars) 

Tax expenditure revenue loss estimates

Tax expenditure revenue loss estimates plus outlays for refundable tax credits

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976-2006.
Page 28 GAO-05-690 Tax Expenditures

Trends in the sum of tax expenditures are due, at least in part, to legislation 

affecting the number or scope of tax expenditures or modifying tax rates or 

other basic structural features of the tax code. During this period, tax 

legislation directly influenced the sum of tax expenditure estimates by 

repealing or limiting some tax expenditures, enacting new ones, and 

extending the life of expiring tax expenditures. Even without changes to 

tax expenditures, legislation affecting tax rates or the tax structure affects 

the sum of the tax expenditure estimates. When a taxpayer uses a tax 

expenditure, his or her effective tax rate34 is reduced, because some part of 

his or her income remains untaxed or is taxed at a lower rate. When 

statutory rates increase, a taxpayer’s ability to avoid tax on a portion of 

income is worth more; consequently, tax expenditures are worth more. 

Likewise, when rates decrease, tax expenditures are worth relatively less.

Figure 6 highlights tax legislation enacted since 1974 that likely influenced 

the aggregate revenue losses due to tax expenditures. The sum of 

estimated revenue losses declined following the Tax Reform Act of 1986,35

primarily because of individual and corporate marginal tax rate reductions 

which indirectly scaled back the value of all but a few tax credits. The 1986 

act, which created the last major tax reform, also eliminated or limited the 

scope of various tax expenditures directly, for example, by repealing the 

investment tax credit, phasing out the interest deduction for consumer 

credit over 5 years, and limiting the expensing of the intangible drilling 

costs for oil and gas to successful, domestic wells. While materially 

reducing the number and scope of tax expenditures broadened the tax 

base, the act resulted in no net change in federal revenue because of the 

lower tax rates. In contrast, the sum of estimated revenue losses increased 

following the Omnibus Budget Reconciliation Act of 1993,36 which directly 

increased several tax expenditures—for example, extending the EITC to 

single workers with no children earning $9,000 or less—and indirectly 

increased the value of other tax expenditures by increasing the top 

individual income tax rates and adding a third rate. The sum of estimated 

revenue losses accelerated following the Taxpayer Relief Act of 1997, 

which expanded several tax expenditures—for example, increasing 

eligibility for traditional individual retirement accounts—and created an 

assortment of new tax expenditures, including the child tax credit and 

34The effective tax rate is the ratio of taxes paid to a taxpayer’s total income.

35Pub. L. No. 99-514, October 21, 1986.

36Pub. L. No. 103-66, August 10, 1993.
Page 29 GAO-05-690 Tax Expenditures

postsecondary education tax incentives. The Economic Growth and Tax 

Relief Reconciliation Act of 200137 reduced tax rates again and also 

increased the individual AMT exemption. The influence on the aggregate 

trend is less apparent for legislation expanding or adding tax expenditures 

while also reducing tax rates.

37Pub. L. No. 107-16, June 7, 2001.
Page 30 GAO-05-690 Tax Expenditures

Figure 6: Tax Legislation Enacted From 1974-2004 That May Have Influenced the Sum of Revenue Loss Estimates for Tax 

Expenditures

Note: The effects of legislative changes on tax expenditure estimates might not have occurred within 

the same year that the legislation was enacted. Summing the revenue loss estimates does not take 

into account possible interaction effects among the tax expenditures that we mentioned earlier in the 

report. Changes in economic conditions and estimation techniques, can affect revenue loss estimates 

0

100

200

300

400

500

600

700

800

900

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Billions of dollars (in constant 2004 dollars)

Fiscal year

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976-2005.

The Revenue Act of 

1978: P.L. 95-600, 

November 6, 1978, made 

the EITC a permanent 

provision of the Internal 

Revenue Code and 

reduced individual and 

corporate tax rates.

The Economic Recovery 

Tax Act of 1981: P.L. 97-

34, August 13, 1981, 

enacted several new tax 

expenditures, expanded 

existing tax expenditures 

for individuals and 

businesses, and phased 

in a 23 percent cut in 

individual tax rates.

The Tax Reform Act of 

1986: P.L. 99-514, October 

22, 1986, removed or scaled 

back several tax 

expenditures, lowered tax 

rates for individuals and 

corporations, and 

broadened the tax base by 

expanding the AMT for 

individuals.

The Omnibus Budget 

Reconciliation Act of 

1990: P.L. 101-508, 

November 5, 1990, 

expanded family eligibility 

for the EITC and replaced 

the top three marginal tax 

rate brackets of the Tax 

Reform Act of 1986 with two 

brackets.

The Omnibus Budget Reconciliation Act 

of 1993: P.L. 103-66, August 10, 1993, 

extended several existing tax expenditures 

that encouraged select forms of investment 

and employment expenditures, and raised 

income tax rates at the very top of the 

income scale.

The Taxpayer Relief Act 

of 1997: P.L. 105-34, 

August 5, 1997, expanded 

several tax expenditures 

and created many new 

provisions, such as the 

child, HOPE, and Lifetime 

Learning education 

credits.

The Economic Growth 

and Tax Relief 

Reconciliation Act of 

2001: P.L. 107-16, June 7, 

2001, expanded several tax 

expenditures, lowered tax 

rates, and created an 

increase in the individual 

alternative minimum tax 

exemption amount.

The Jobs and Growth Tax Relief 

Reconciliation Act of 2003: P.L. 108-27, 

May 28, 2003, increased the child tax credit, 

and accelerated reductions in the regular 

income tax rates that were scheduled for 

2004 through 2006.

American Jobs Creation Act of 2004: P.L. 108-357, October 22, 2004, 

extended several tax provisions that expired in 2003 or were scheduled 

to expire in 2004, including the research and development tax credit; 

simplified the rules for utilizing foreign tax credits; and reduced the 

corporate tax rate from 35 percent for domestic manufacturers, 

producers, farmers, and small corporations.
Page 31 GAO-05-690 Tax Expenditures

for tax expenditures, making them differ from year to year. Changes to the number of tax expenditures 

reported by Treasury would also affect the amount of revenue loss reported if some tax expenditures 

were eliminated or added. Finally, revenue loss estimates include the effect of certain tax credits on 

receipts only and not the effect of the credits on outlays.

Changes in economic conditions and in the baseline tax system can also 

affect revenue loss estimates for tax expenditures, making them differ from 

year to year. For example, rising housing prices may cause the estimated 

cost of the mortgage interest deduction to increase as homeowners finance 

larger mortgages or take out equity with home equity loans. In addition, 

changes in tax expenditure baselines could also cause estimates to differ 

from year to year. For example, for fiscal years 2003 and 2004, Treasury 

redefined accelerated depreciation tax expenditures so that they are 

calculated relative to a replacement cost basis baseline rather than the 

historic cost basis previously used. This redefinition had the effect of 

reducing the estimated size of the accelerated depreciation tax 

expenditures.38

Tax Expenditures for 

Individual Taxpayers 

Accounted for Most of the 

Sum of Tax Expenditure 

Revenue Losses

The sum of estimated revenue losses due to tax expenditures for individual 

income taxpayers accounted for substantially more of the revenue loss 

between 1974 and 2004 than corporate tax expenditures, as shown in figure 

7. The sum of revenue loss estimates for tax expenditures that arise under 

the individual income tax increased from approximately $187 billion for 

1974 to $487 billion for 1987 (in 2004 dollars). After decreasing to 

approximately $363 billion for 1988, the sum gradually increased to a high 

of approximately $688 billion for 2002 and then declined in 2003 and 2004. 

On average over the entire period, revenue loss estimates for individual 

income taxpayers accounted for about 83 percent of the sum of revenue 

loss estimates per year. While estimated revenue losses for all tax 

expenditures tripled, the sum of revenue loss estimates for corporate tax 

expenditures increased from approximately $57 billion for fiscal year 1974 

to a high of about $116 billion in 1984 (in 2004 dollars). After 1984, the sum 

dropped back to approximately $57 billion in 1992 and increased slightly 

over the rest of the period, with some fluctuation between years. In 2004, 

revenue loss estimates for tax expenditures that arise under the corporate 

income tax accounted for 11 percent of the sum of revenue losses due to all 

38This is one of the reasons why the sum of tax expenditure revenue loss estimates by 

Treasury and JCT, which had been tracking each other rather closely since 1987, diverged in 

2003 and 2004. While Treasury has changed its tax expenditure baselines over time, JCT’s 

tax expenditure baseline has changed little over time. See app. III for additional information 

on how JCT and Treasury measure tax expenditures.
Page 32 GAO-05-690 Tax Expenditures

tax expenditures. At about 10 percent of total federal receipts, corporate 

income taxes also accounted for a smaller share than individual income 

taxes.

Figure 7: Sum of Revenue Loss Estimates by Taxpayer Group, 1974-2004

Note: Treasury did not report separate estimates for the individual and corporate income tax 

expenditures for fiscal years 1981 and 1982. Total revenue loss estimates for fiscal years 1981 and 

1982 were approximately $410 and $448 billion (in 2004 dollars). The location of tax expenditure 

estimates under the individual and corporate tax expenditure headings does not imply that these 

categories of filers benefit from the special tax provisions in proportion to the respective tax 

expenditure amounts shown. For instance, the ultimate beneficiaries of corporate tax expenditures 

could be shareholders, employees, customers, or other providers of capital, depending on economic 

forces. In addition, summing the revenue loss estimates does not take into account possible 

interaction effects among the tax expenditures that we mentioned earlier in the report. Changes in 

economic conditions and estimation techniques, can affect revenue loss estimates for tax 

expenditures, making them differ from year to year. Changes to the number of tax expenditures 

reported by Treasury would also affect the amount of revenue loss reported if some tax expenditures 

were eliminated or added. Finally, revenue loss estimates include the effect of certain tax credits on 

receipts only and not the effect of the credits on outlays.

The sum of revenue loss estimates due to individual income tax 

expenditures is primarily attributable to a small number of large tax 

expenditures. The fourteen tax expenditures listed in table 2—each with 

an annual revenue loss estimated at $20 billion or more—accounted for 

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

Fiscal year

Dollars in billions (in constant 2004 dollars) 

Corporate

Individual

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976-2006.

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

19891990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

N/A N/A
Page 33 GAO-05-690 Tax Expenditures

about 75 percent of the sum of revenue losses for fiscal year 2004. Ten of 

the 14 largest tax expenditures focused entirely on individual taxpayers, 

and the other 4 were available for individuals and corporations. Most of 

the largest tax expenditures are long-standing ones, and only 2 of the 14 

were added to the tax code since 1986.39 The child tax credit, enacted in 

1997, is among the largest tax expenditures based on its estimated revenue 

losses alone, not counting associated outlays of $8.9 billion in fiscal year 

2004. With revenue losses estimated at $4.9 billion, the EITC does not 

appear on this list; if $33.1 billion in associated outlays were included, this 

refundable credit ranks among the largest tax expenditures.

39The exclusion of net imputed rental income on owner-occupied homes is a long-standing 

feature of the income tax system. It was first listed as a tax expenditure by Treasury in the 

2006 budget; JCT does not list this tax expenditure.
Page 34 GAO-05-690 Tax Expenditures

Table 2: Revenue Loss Estimates for the Largest Tax Expenditures Reported for Fiscal Year 2004, with Taxpayer Group and 

Budget Function

Source: GAO analysis of OMB budget report on tax expenditures, fiscal year 2006.

a

Denotes tax expenditures that have been reported by Treasury since 1974.

Note: Some tax expenditures split into additional listings to reflect legislation expanding existing tax 

expenditures. For example, Treasury began listing the net exclusion of pension contributions and 

earnings with separate estimates for employer-defined benefits and 401(k) pension plans following 

2001 legislation increasing the contribution limits for 401(k) accounts. From year to year, revenue loss 

estimates may change because Treasury updates their estimates for each new budget to reflect 

legislation enacted, prevailing economic conditions, and the latest taxpayer data available. Although 

there are substantial revenues forgone for these 14 large tax expenditures, the estimated amount of 

Tax expenditure

Revenue loss

estimate

(Billions $)

Revenue loss

estimate as a

percentage

of sum Taxpayer group Budget function

Income tax exclusion of employer 

contributions to medical insurance premiums 

and medical carea

$102.3 14.0% Individual Health

Deductibility of mortgage interest on owner 

occupied homesa

61.5 8.4% Individual Commerce and housing 

credit

Net exclusion of pension contributions and 

earnings: 401(k)

47.7 6.6% Individual Income security

Net exclusion of pension contributions and 

earnings: employer plansa

47.0 6.5% Individual Income security

Deductibility of nonbusiness state and local 

taxes (other than on owner-occupied homes)a

45.3 6.2% Individual General purpose fiscal 

assistance

Accelerated depreciation of machinery and 

equipment 

44.7 6.1% Corporate and 

Individual

Commerce and housing 

credit

Capital gains exclusion on home sales 29.7 4.1% Individual Commerce and housing 

credit

Deductibility of charitable contributions other 

than education and healtha

27.4 3.8% Corporate and 

Individual

Education, training, 

employment, social 

services

Exclusion of interest on public purpose state 

and local bondsa

26.2 3.6% Corporate and 

Individual

General purpose fiscal 

assistance

Capital gains (other than agriculture, timber, 

iron ore, and coal)a

25.2 3.5% Individual Commerce and housing 

credit

Exclusion of net imputed rental income on 

owner-occupied homes

24.6 3.4% Individual Commerce and housing 

credit

Step-up basis of capital gains at death 24.2 3.3% Individual Commerce and housing 

credit

Child credit (effect on receipts only) 22.4 3.1% Individual Education, training, 

employment, and social 

services

Exclusion of interest on life insurance savingsa 20.1 2.98% Corporate and 

Individual

Commerce and housing 

credit
Page 35 GAO-05-690 Tax Expenditures

federal spending that would be required to provide equivalent assistance is frequently larger than the 

revenue forgone because this spending could be subject to income tax. For example, the outlayequivalent estimate for the income tax exclusion of employer contributions for medical insurance 

premiums and medical care is $126.7 billion for fiscal year 2004. Outlay-equivalent estimates for tax 

expenditures are discussed in more detail in app. III.

Tax expenditure revenue loss estimates reflect federal income tax revenue 

forgone and do not account for provisions that exclude certain earnings 

from payroll taxes. For example, the income tax exclusion for health care 

not only permits the value of health insurance premiums to be excluded 

from the calculation of employees’ taxable earnings for income taxes but 

also excludes the value of the premiums from the calculation of Social 

Security and Medicare payroll taxes for both employees and employers.40 

Some researchers have estimated that these payroll tax revenue losses 

amount to more than half of the income tax revenue losses. 41 If payroll tax 

revenue losses were 50 percent of the $102.3 billion in income tax revenue 

loss estimated by Treasury, the combined revenue loss associated with the 

exclusion of employer contributions for health insurance premiums would 

be $153.5 billion in 2004.

While Tax Expenditures 

Have Exceeded 

Discretionary Spending in 

Some Years, They Have 

Remained Relatively Stable 

as a Share of the U.S. 

Economy

The sum of tax expenditure outlay-equivalent estimates exceeded the 

amount of discretionary spending for most years during the last decade, as 

shown in figure 8.42 Outlay-equivalent estimates, introduced by Treasury in 

1981, allow the value of a tax expenditure to be compared with a direct 

federal outlay. The sum of the outlay-equivalent estimates reported by 

Treasury was approximately $853 billion in 2004.43 Until 1987, the sum of 

outlay-equivalent estimates for tax expenditures was roughly the same 

magnitude as discretionary spending. From 1988 through 1995, the sum of 

tax expenditure outlay-equivalent estimates averaged about $104 billion (in 

40Employers may deduct their premium payments as a business expense in calculating their 

net taxable income; this deduction, like those for other labor costs, is not a tax benefit for 

employers.

41John Sheils and Randall Haught, “The Cost of Tax-Exempt Health Benefits in 2004,” Health 

Affairs (Feb. 25, 2004 ); and Leonard E. Burman and Jonathan Gruber, “Tax Credits for 

Health Insurance,” Tax Policy Center Discussion Paper No. 19 (Washington, D.C.: The Tax 

Policy Center, June 2005).

42When measured in terms of sum of revenue loss estimates, tax expenditures also exceeded 

discretionary spending in some years.

43The sum of tax expenditure outlay-equivalent estimates plus outlays associated with 

refundable credits amounted to $896 billion in fiscal year 2004.
Page 36 GAO-05-690 Tax Expenditures

2004 dollars) less than annual discretionary spending. Beginning in 1996, 

the sum of tax expenditure outlay-equivalent estimates surpassed 

discretionary spending and averaged about $114 billion (in 2004 dollars) 

more than annual discretionary spending through 2003. However, in 2003, 

the sum of Treasury’s tax expenditure estimates declined markedly, and the 

sum of tax expenditure outlays fell below discretionary spending in fiscal 

year 2004. This decline may be due, at least in part, to changes in the way 

Treasury defined and measured several tax expenditures in these years. 

Just as the sum of tax expenditure outlay-equivalent estimates increased 

since the late 1990s, discretionary spending also increased over this period. 

Between 1996 and 2002, the sum of tax expenditure estimates increased by 

an average of approximately $46 billion annually, while discretionary 

spending increased by an average of $21 billion annually (in 2004 dollars). 

Mandatory spending—larger than the sum of tax expenditure estimates or 

discretionary spending—consistently rose over the period shown by an 

average of $43 billion annually (in 2004 dollars).

Figure 8: Sum of Tax Expenditure Outlay-equivalent Estimates Compared with Total Mandatory and Total Discretionary Outlays, 

1981-2004

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal year

Dollars in billions (in constant 2004 dollars)

Mandatory spending

Discretionary spending

Tax expenditure outlay equivalent estimates

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1983-2006
Page 37 GAO-05-690 Tax Expenditures

Note: Mandatory spending includes net interest. Summing the outlay-equivalent estimates does not 

take into account possible interaction effects among the tax expenditures. In addition, tax expenditure 

estimates developed in different years generally use different economic, demographic, and other 

assumptions. Finally, changes to the number of tax expenditures reported by Treasury would also 

affect the amount of outlay-equivalent estimates reported if some tax expenditures were eliminated or 

added. 

Figure 9 compares tax expenditures and federal outlays as a share of GDP 

as a way to measure the amount of federal spending through the tax code 

and other programs relative to the economy.44 As a share of the U.S. 

economy, the sum of tax expenditure outlay-equivalent estimates peaked at 

10.9 percent of GDP in 1986. Since 1988, the sum of tax expenditure 

outlays has remained relatively stable at about 7.5 percent of GDP. Over 

the period shown, mandatory spending also was fairly constant as a share 

of the economy, at an average of 12.7 percent of GDP. As a share of the 

economy, discretionary spending declined from 10.1 percent of GDP in 

1981 to 6.3 percent in 1999 and 2000, with some fluctuation between the 

years. In recent years, discretionary spending has grown faster than the 

economy, increasing to 7.8 percent of GDP in fiscal year 2004. Averaging 

about 18.0 percent of GDP in the 1980s through the early 1990s, federal 

receipts steadily rose to 20.9 percent of GDP in 2000 and since declined to 

16.3 percent of GDP in fiscal year 2004. With total federal outlays—

including mandatory and discretionary spending plus net interest—

reaching 19.9 percent of GDP, the federal unified budget deficit amounted 

to 3.6 percent of GDP ($412 billion) in fiscal year 2004. The on-budget 

deficit in fiscal year 2004 amounted to 4.9 percent of GDP ($567 billion).45

44Expressing tax expenditures as a share of the nation’s economy provides the context for 

assessing trends in federal revenue and spending. GDP is a commonly used measure of 

domestic national income. GDP is the value of all goods and services produced within the 

United States in a given year and is conceptually equivalent to incomes earned in 

production. It is a rough indicator of the economic earnings base from which the 

government draws its revenues.

45Whereas the unified budget is a consolidated measure of federal activity, the on-budget 

deficit excludes Social Security and the Postal Service which are off-budget under current 

law. In fiscal year 2004, the off-budget surplus included a $151 billion Social Security surplus 

and a $4 billion surplus for the Postal Service.
Page 38 GAO-05-690 Tax Expenditures

Figure 9: Sum of Tax Expenditure Outlay-Equivalent Estimates Compared to Total Mandatory and Discretionary Outlays and 

Receipts as a Percentage of GDP, 1981-2004

Note: Mandatory spending includes net interest. Whereas the mandatory and discretionary numbers 

represent actual money that was spent by the federal government, tax expenditure figures are 

estimates. In addition, summing the outlay-equivalent estimates does not take into account possible 

interaction effects among the tax expenditures that we mentioned earlier in the report. Tax expenditure 

estimates developed in different years generally use different economic, demographic, and other 

assumptions. Changes to the number of tax expenditures reported by Treasury would also affect the 

amount of outlay-equivalent estimates reported if some tax expenditures were eliminated or added.

Tax expenditures span almost all federal mission areas, but their relative 

size differs across budget functions. To gauge the relative role of tax 

expenditures, the sum of tax expenditure outlay-equivalent estimates and 

federal outlays can be compared to total spending by budget function. For 

2004, Treasury reported tax expenditures for 16 of 20 budget functions. 

Five of the functions accounted for 91 percent of the sum of the tax 

expenditure outlay-equivalent estimated dollar amounts in 2004—

commerce and housing credit; education, training, employment and social 

services; income security; health; and general government, as shown in 

figure 10. (See app. III for a list of tax expenditures reported for 2004 by 

budget function.) For the most part, these same five budget functions 

accounted for the largest percentage of total outlay-equivalent estimates 

0

5

10

15

20

25

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal year

Percent of GDP

Receipts

Mandatory spending

Discretionary spending

Tax expenditure outlay equivalent estimates

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1983-2006.
Page 39 GAO-05-690 Tax Expenditures

over time, although the relative size of the estimated outlay-equivalent 

dollar amounts for the five budget functions varied somewhat over the 

period shown. For example, the health and the education, training, 

employment and social services budget functions more than doubled 

between 1986 and 2002 (in 2004 dollars).

Figure 10: Size of Tax Expenditure Outlay-Equivalent Estimates by Budget Function, 1981-2004 

Note: The other budget functions that Treasury lists tax expenditures under are national defense; 

international affairs; general science, space, and technology; energy; natural resources and 

environment; agriculture; transportation; community and regional development; social security; 

veterans’ benefits and services; and net interest. The general government budget function includes 

tax expenditures listed by Treasury under the general purpose fiscal assistance budget subfunction. 

For two budget functions—commerce and housing credit; and education, training, employment, and 

social services—tax expenditures are listed by subfunction. In addition, summing the outlayequivalent estimates by budget function does not take into account possible interaction effects among 

the expenditures. Tax expenditure estimates developed in different years generally use different 

economic, demographic, and other assumptions. Changes to the number of tax expenditures reported 

by Treasury would also affect the amount of outlay-equivalent estimates reported if some tax 

expenditures were eliminated or added.

0

100

200

300

400

500

600

700

800

900

1000

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Dollars in billions (in constant 2004 dollars)

Other

Education, training, employment, and social services

General government

Health

Income security

Commerce and housing

Source: GAO Analysis of OMB Budget Reports on Tax Expenditures, Fiscal Years 1983-2006.
Page 40 GAO-05-690 Tax Expenditures

The sum of the tax expenditure outlay-equivalent estimates was greater 

than what the federal government spends in discretionary and mandatory 

spending for some budget functions. As shown in figure 11, the sum of the 

tax expenditure outlay-equivalent estimates exceeded federal outlays for 

three budget functions: energy, 46 commerce and housing credit, and 

general government. Outlay-equivalent estimates for tax expenditures in 

the commerce and housing credit budget function totaled $300 billion for 

2004, while budget outlays for that function totaled $5 billion.47 Seven of 

the 14 largest tax expenditures, listed in table 2 with revenue losses 

exceeding $20 billion in 2004, were reported under the commerce and 

housing credit budget function. The mortgage interest deduction—the 

second largest single tax expenditure in fiscal year 2004—had an outlayequivalent estimate of $61.5 billion, compared to $45 billion in outlays for 

the Department of Housing and Urban Development, which is responsible 

for, among other things, mortgage credit and housing assistance 

programs.48 Various tax expenditures for accelerated depreciation and 

capital gains listed under the commerce and housing credit budget function 

also provide incentives for a wide range of different investments that can 

affect other federal mission areas. The general government budget 

function included two of the largest tax expenditures—the deduction of 

state and local income and sales tax, and the exclusion of interest on public 

purpose state and local bonds—which together accounted for about $71.5 

billion in tax expenditures outlays.49

46Total outlays for the energy budget function were negative in fiscal year 2004; energy 

discretionary outlays were $3.4 billion and energy mandatory outlays were negative 

$3.6 billion. For more information on the major federal energy-related tax and spending 

programs, see GAO, National Energy Policy: Inventory of Major Federal Energy Programs 

and Status of Policy Recommendations, GAO-05-379 (Washington, D.C.: June 10, 2005).

47Within the commerce and housing credit budget function, outlays in fiscal year 2004 by 

subfunction were: $ 2.7 billion for mortgage credit, negative $4.1 billion for the Postal 

Service, negative $2 billion for deposit insurance, and $8.7 billion for other advancement of 

commerce.

48Housing assistance is a subfunction under the income security budget function.

49The deduction for property taxes on owner-occupied homes is listed under the commerce 

and housing credit budget function. Estimated at $19.9 billion in outlay-equivalent value, 

this deduction was one of the 15 largest tax expenditures in fiscal year 2004. Including this 

deduction, the sum of the outlay-equivalent estimates for tax expenditures related to state 

and local governments amounted to $102.7 billion in fiscal year 2004. The outlay-equivalent 

value of the exclusion for state-and local private purpose bonds totaled $9.4 billion in fiscal 

year 2004. These amounts are reflected across the related budget functions.
Page 41 GAO-05-690 Tax Expenditures

Figure 11: Tax Expenditure Outlay-equivalent Estimates Compared with Federal 

Outlays by Budget Function, Fiscal Year 2004

Note: Federal outlays for the energy budget function were negative because revenues for this function 

exceeded spending in 2004. Summing the outlay-equivalent estimates by budget function does not 

0 50 100 150 200 250 300 350 400 450 500

Budget function

Dollars in billions

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal year 2006.

National defense

Tax expenditure outlay equivalent estimates

Federal outlays 

Education, training,

employment, and

social services

Health

Income security

Social security

Veterans benefits

and services

Energy

Natural resources

and environment

Commerce and

housing credit

Transportation

Community and

regional development

Net interest

Medicare

Administration

of justice

International affairs

General science, space

and technology

Agriculture

General government
Page 42 GAO-05-690 Tax Expenditures

take into account possible interaction effects among the expenditures. Outlays associated with the 

refundable child credit and EITC are shown in the outlay bars.

As figure 11 shows, the sum of outlay-equivalent estimates for tax 

expenditures was nearly the same magnitude as outlays in two budget 

functions: international affairs and education, training, employment, and 

social services. Within the education, training, employment, and social 

services budget function, the sum of outlay-equivalent estimates of the tax 

expenditures represented 49 percent of the total federal support.50 This 

budget function includes two of the largest tax expenditures—the child tax 

credit and charitable contributions other than for health. The sum of the 

outlay-equivalent estimates for tax expenditures was substantially less than 

total outlays in the health and income security budget functions.51 The 

income tax exclusion for employer-provided health care—the largest single 

tax expenditure—accounted for 12 percent of the sum of tax expenditure 

outlay-equivalent estimates and represented about 27 percent of total 

federal support in the health function, which includes Medicaid. Outlays in 

the income security function include mandatory outlays refunded under 

the EITC and child tax credit. No tax expenditures are reported by 

Treasury for two budget functions: administration of justice and 

Medicare.52

50Total federal support includes federal outlays and tax expenditure outlay-equivalent 

amounts within the same budget function.

51Treasury and JCT list the EITC tax expenditure under the income security budget function 

and the child tax credit under the education, training, employment and social services 

budget function.

52JCT does not list any tax expenditures under the administration of justice budget function 

but does list exclusions for Medicare benefits as a tax expenditure under the Medicare 

budget function.
Page 43 GAO-05-690 Tax Expenditures

Systematic Review of 

Tax Expenditures Is 

Integral to 

Reexamining the 

Federal Base, but Little 

Progress Has Been 

Made Since 1994 to 

Increase Scrutiny

Although tax expenditures represent a substantial federal commitment of 

resources, little progress has been made in the Executive Branch to 

increase the transparency of and accountability for tax expenditures. The 

entire set of tools the federal government can use to address national 

objectives—including discretionary and mandatory spending, tax 

provisions, loans and loan guarantees—should be subject to periodic 

reviews and reexamination to ensure that they are achieving their intended 

purposes and designed in the most efficient and effective manner. The 

nation’s current and projected fiscal imbalance provides an additional 

impetus for engaging in such a review and reassessment. Tax expenditures 

may not always be efficient, effective, or equitable, and consequently, 

information on these attributes can help policymakers make more 

informed decisions as they adapt current policies in light of our fiscal 

challenges and other overarching trends. In addition, some tax 

expenditures, at least as currently designed, may serve to exacerbate other 

key private sector and public policy challenges (e.g., controlling health care 

costs). To review tax expenditures, information is needed to assess 

economic efficiency, effectiveness, distributional equity, and 

administration and compliance costs, although data and methodological 

challenges may impede studies of some tax expenditures. Over the past 

decade, the Executive Branch made little progress to integrate tax 

expenditures in the budget presentation and review processes that apply to 

spending programs, as we recommended in 1994.

Long-Term Fiscal Challenge 

Provides Additional Impetus 

to Reexamine Federal 

Spending and Tax Policies, 

Including Tax Expenditures

Simply put, our nation’s fiscal policy is on an unsustainable course. Longterm simulations by GAO, the Congressional Budget Office (CBO), and 

others show that over the long term we face large, escalating, and 

persistent deficits due primarily to known demographic trends and rising 

health care costs.53 This unsustainable fiscal path will gradually erode the 

nation’s economy and increasingly constrain the federal government’s 

capacity to address emerging challenges and opportunities. The long-term 

fiscal challenge is too big to be solved by economic growth alone or by 

making modest changes to existing spending and tax policies, including tax 

53For additional information on our long-term fiscal modeling, see GAO, Our Nation’s Fiscal 

Outlook: The Federal Government’s Long-Term Budget Imbalance, 

http://www.gao.gov/special.pubs/longterm/. See also U.S. Congressional Budget Office, The 

Long-Term Budget Outlook (Washington, D.C.: December 2003), and the Office of 

Management and Budget, Analytical Perspectives, Budget of the United States 

Government, Fiscal Year 2006 (Washington, D.C.: 2005).
Page 44 GAO-05-690 Tax Expenditures

expenditures. In addition, the long-term fiscal challenge makes it all the 

more important to ensure all major federal spending and tax programs and 

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

The revenues forgone through tax expenditures either reduce resources 

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

a given amount of revenue.

Our long-term simulations illustrate the magnitude of fiscal challenges we 

will face in the future.54 Figures 12 and 13 present these simulations under 

two different sets of assumptions. In figure 12, we begin with CBO’s August 

2005 baseline—constructed according to the statutory requirements for 

that baseline.55 Consistent with these requirements, this simulation 

assumes that discretionary spending grows with inflation for the first 10 

years, and that tax cuts which are currently scheduled to expire will expire. 

After 2015, discretionary spending is assumed to grow with the economy, 

and revenue is held constant as a share of GDP at the 2015 level. In figure 

13, only two assumptions are changed: (1) discretionary spending is 

assumed to grow with the economy rather than merely with inflation for 

the entire period (not just after 2015), and (2) all tax cuts which are 

currently scheduled to expire are made permanent. For both simulations, 

Social Security and Medicare spending is based on the 2005 Trustees’ 

intermediate projections, and we assume that benefits continue to be paid 

in full after the trust funds are exhausted. Medicaid spending is based on 

CBO’s December 2003 long-term projections under mid-range assumptions.

54Long-term simulations illustrate the relative fiscal and economic outcomes associated with 

alternative policy paths and should not be viewed as precise forecasts.

55 Congressional Budget Office, The Budget and Economic Outlook: An Update

(Washington, D.C.: August 2005).
Page 45 GAO-05-690 Tax Expenditures

Figure 12: Composition of Spending as a Share of GDP under Baseline Extended

Notes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2015 due 

to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue 

from tax-deferred retirement accounts. After 2015, revenue as a share of GDP is held constant. 

0

10

20

30

40

50

2004 2015 2030 2040

Net interest

Social Security

Medicare & Medicaid

All other spending

Fiscal year

Percent of GDP

Source: GAO’s August 2005 analysis.

Revenue
Page 46 GAO-05-690 Tax Expenditures

Figure 13: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP after 2005 and All Expiring Tax Provisions Are Extended

Notes: Although expiring tax provisions are extended, revenue as a share of GDP increases through 

2015 due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased 

revenue from tax-deferred retirement accounts. After 2015, revenue as a share of GDP is held 

constant.

Both of these simulations illustrate that, absent policy changes on the 

spending or revenue side of the budget, the growth in federal retirement 

and health entitlements will encumber an escalating share of the 

government’s resources. Indeed, when we assume that recent tax 

reductions are made permanent and discretionary spending keeps pace 

with the economy, our long-term simulations suggest that by 2040 federal 

revenue may be adequate to pay little more than interest on the federal 

debt. Neither slowing the growth in discretionary spending nor allowing 

the tax provisions to expire—nor both combined—would eliminate the 

imbalance. Although revenues will be part of the debate about our fiscal 

future, making no changes to Social Security, Medicare, Medicaid, and 

0

10

20

30

40

50

2004 2015 2030 2040

Net interest

Social Security

Medicare & Medicaid

All other spending

Fiscal year

Percent of GDP

Source: GAO’s August 2005 analysis.

Revenue
Page 47 GAO-05-690 Tax Expenditures

other drivers of the long-term fiscal gap would require at least a doubling of 

federal taxes in the future and that seems both unrealistic and 

inappropriate. Accordingly, substantive reform of Social Security and the 

major health programs remains critical to recapturing our fiscal flexibility.

While Social Security and Medicare dominate the long-term outlook, they 

are not the only federal programs or activities that bind the future. The 

federal government undertakes a wide range of programs, responsibilities, 

and activities that may explicitly or implicitly expose it to future spending. 

These “fiscal exposures” range from explicit liabilities, such as 

environmental cleanup and disposal, to the implicit promises embedded in 

current policy or public expectations, such as assistance following a major 

disaster.56 Policymakers may benefit from a better understanding of the 

long-term costs of decisions when they are made. For large and significant 

spending programs and tax provisions, consideration of estimates of 

present values for the long-term commitments implied could facilitate 

analysis and decisionmaking.57 While the fiscal exposure concept focuses 

only on items that may expose the government to future spending, some 

new or existing tax expenditures may have uncertain or accelerating future 

growth paths with long-term implications. These would need to be 

considered concurrently with long-term spending exposures in addressing 

long-term fiscal sustainability.

Confronting the nation’s fiscal challenge will require a fundamental 

reexamination and reprioritization of the entire set of tools the federal 

government can use to address national objectives, including major 

spending and tax policies and programs. To effectively respond to social, 

economic, and security changes and challenges emerging in the 21st 

century, the federal government cannot accept what it does, how it does it, 

who does it, and how it is financed as “givens.” To assist Congress in 

reexamining the base of government, we issued a report that provides 

examples of the kinds of difficult choices the nation faces with regard to 

discretionary spending; mandatory spending, including entitlements; as 

56GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and 

Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).

57See app. III for information about Treasury’s supplemental discounted present value 

estimates for select tax expenditures that involve deferrals or other long-term revenue 

effects.
Page 48 GAO-05-690 Tax Expenditures

well as tax policies and compliance activities.58 The tax policies and 

programs financing the federal budget can be reviewed with an eye toward 

the overall level of revenue needed to fund federal operations and 

commitments, the mix of taxes that should be used, and the extent to 

which the tax code is being used to promote certain societal objectives.59

Some Tax Expenditures 

May Not Be Efficient, 

Effective, or Equitable

Some tax expenditures may not always be efficient, effective, or equitable, 

and consequently, information on these attributes can help policymakers 

make more informed decisions as they adapt current policies in light of our 

fiscal challenges and other overarching trends. Periodic reviews of tax 

expenditures could help to establish whether these programs are relevant 

to today’s needs; if so, how well tax expenditures have worked to achieve 

their objectives; and whether the benefits from particular tax expenditures 

are greater than their costs. To measure benefits and costs, information is 

needed concerning their effects on economic efficiency, effectiveness, 

distributional equity, and administration and compliance costs. To the 

extent that periodic reviews show that specific tax expenditures are not 

effective, efficient, or equitable, those tax expenditures might be 

eliminated or redesigned, perhaps at a lower cost in revenue forgone. 

Coordinated reviews of tax expenditures with related federal spending 

programs could assess the relationships and interactions of programs 

within similar mission areas and identify which strategies are effective. 

Policymakers could use such evaluations to reduce overlap and 

inconsistencies and direct scarce resources to the most effective or least 

costly methods to deliver federal support.

Tax expenditures, if well designed and effectively implemented, can be an 

effective tool and appropriate to further some federal goals and objectives. 

For those activities that merit a subsidy (where too little of the activity 

would otherwise be undertaken), subsidies through the tax code are one 

option. For example, a tax expenditure for medical insurance would 

improve economic efficiency if, absent a subsidy, too few workers would 

purchase insurance and the tax expenditure encouraged workers to insure 

58GAO-05-325SP.

59For background information, criteria, and key questions for assessing the pros and cons of 

tax reform proposals, both proposals for a major overhaul of the current federal tax system 

and incremental changes to the system, see GAO, Understanding the Tax Reform Debate: 

Background, Criteria, and Questions, GAO-05-1009SP (Washington, D.C.: 

September 2005).
Page 49 GAO-05-690 Tax Expenditures

in a cost-effective manner. Because the benefits from research may not 

fully accrue to the firms that bear the costs of research, a tax expenditure 

aimed at spurring private-sector investment in research and development 

may be an appropriate response assuming it stimulates additional research 

whose benefits exceed the social costs associated with the forgone 

revenues.

However, studies we and others have done raise concerns about the 

efficiency, effectiveness, or equity of some tax expenditures and about how 

tax expenditures relate to other federal activities aimed at the same 

mission area.

• While tax expenditures may be intended to improve economic 

efficiency, poor targeting or design may introduce additional economic 

inefficiencies. For example, the income tax exclusion of employer-paid 

health insurance premiums, by shifting a portion of the costs to all 

taxpayers, reduces the after-tax cost of insurance for the beneficiary.60 

The income tax exclusion is credited with increasing health care 

coverage for employees, and the risk pooling under group health 

insurance generally allows employees to obtain insurance at lower costs 

than in the individual insurance market. However, this tax benefit also 

leads people to obtain more coverage than they would otherwise and 

increases the demand for health care by enabling those insured to 

obtain services at discounted prices. Some researchers believe that the 

unlimited availability of the exclusion for employer-provided health 

insurance has led to excessive use of health care services, which, in 

turn, has helped to drive up health care prices faster than the overall 

price level.61 Capping the exclusion at the average premium cost has 

been suggested as one option to improve the economic efficiency of this 

tax expenditure and reduce the associated revenue loss; another option 

suggested is replacing the tax exclusion with a tax credit to improve 

equity since the tax savings per dollar of premium would be the same for 

all taxpayers. In another example, the mortgage interest deduction 

encourages home ownership by lowering the costs of borrowing for 

taxpayers who itemize their deductions. However, by doing so, the 

deduction encourages households to invest more in housing and less in 

60This tax-free benefit is not reported on the employee’s W-2 form as the amount is not 

considered wages subject to federal and state income taxes or federal payroll taxes.

61Bob Lyke, Tax Benefits for Health Insurance and Expenses: Current Legislation. 

Congressional Research Service Issue Brief IB98037 (Washington, D.C.: February 2005).
Page 50 GAO-05-690 Tax Expenditures

other assets that might contribute more to the nation’s productivity and 

economic capacity. According to CBO’s Budget Options, limiting the 

deductibility of interest to $500,000 of mortgage debt might still provide 

taxpayers with a sizable incentive to become homeowners and could 

boost investment in businesses and education.62

• Tax expenditures may not be an effective way to achieve federal goals if 

targeting them to entities or activities meant to receive the benefits is 

difficult, if they subsidize activities that would have been undertaken 

without their stimulus, or if they serve to exacerbate other key private 

sector and public policy challenges. For example, the income tax 

exclusion of employer-paid health insurance premiums reduces the 

after-tax cost of insurance for the beneficiary. However, the exclusion 

offers no benefit to workers whose employers do not offer health 

benefits or who purchase their own insurance. Further, this tax benefit 

also leads people to obtain more comprehensive coverage than they 

would otherwise and could increase the demand for health care to the 

extent that it shields those insured from the full costs of health care, 

complicating efforts to moderate health care spending. The exclusion 

also tends to favor higher-income workers more likely to have employersponsored coverage. In another example, individual retirement 

accounts (IRAs) also receive preferential tax treatment with $7.5 billion 

in estimated revenue losses in fiscal year 2004. Contributions may be 

tax-deductible depending on the IRA type, and earnings generally are 

not taxable until distribution and not taxable at all in some cases.63 

Although the tax benefits indeed seem to encourage individuals to 

contribute to these kinds of accounts, the amounts contributed may not 

be totally new saving. Some contributions may represent amounts that 

would have occurred without the tax incentives or amounts shifted from 

taxable assets or financed by borrowing. In a 1996 symposium 

examining universal deductible IRAs available in the early 1980s, 

researchers reached three widely divergent conclusions: (1) yes, most 

contributions represented new saving, (2) no, most IRAs contributions 

were not new saving; and (3) maybe, about 26 cents of each dollar 

62Congressional Budget Office, Budget Options (Washington, D.C.: February 2005).

63For more information on the types of IRAs as well as the rules and limit on contributions 

and distributions, see Department of the Treasury, Internal Revenue Service, Individual 

Retirement Accounts (IRAs), Publication 590.
Page 51 GAO-05-690 Tax Expenditures

contributed may have represented new saving.64 More recent research 

examining the universal IRA experience estimated that at most 9 cents 

of each dollar contributed represented new saving.65 Since 1986, 

Congress has restricted IRA eligibility for higher-income taxpayers and 

increased the contribution limits, and the overall effect of IRAs on 

personal saving remains subject to considerable debate.

• Although tax expenditures, by design, result in individuals with similar 

incomes and expenses paying differing amounts of tax depending on 

whether they engage in tax-subsidized activities, tax expenditures still 

may raise equity concerns. Some tax expenditures benefit mainly upperincome taxpayers because they are most likely to itemize and because 

the value of tax expenditures is generally greatest for those in higher tax 

brackets.

Tax expenditures also can contribute to mission fragmentation and 

program overlap,66 and this, in turn, creates the potential for duplication 

and service gaps. Though sometimes necessary to meet federal priorities, 

mission fragmentation and program overlap can create an environment in 

which programs do not serve participants as efficiently and effectively as 

possible. Like spending programs, tax expenditures may reduce 

government effectiveness to the extent that they duplicate or interfere with 

other federal programs. For example, in the higher education mission area, 

the federal government helps students and families save and pay for the 

costs of postsecondary education through tax expenditures and longerstanding federal financial aid programs, consisting of grants, loans, and 

work-study income. Since the 1990s, the federal government has offered 

multiple tax incentives to help families pay for post-secondary education, 

including the nonrefundable Lifetime Learning and HOPE tax credits, 

deductions for qualifying post-secondary expenses and interest on student 

loans, and two tax-preferred ways to save for future education expenses. 

The tax-preferred saving vehicles interact with the traditional federal aid 

64GAO, National Saving: Answers to Key Questions, GAO-01-591SP (Washington, D.C.: 

June 2001).

65Orazio P. Attanasio and Thomas DeLeire, “The Effect of Individual Retirement Accounts on 

Household Consumption and National Saving,” The Economic Journal, Vol. 112, July 2002, 

pp. 504-538.

66We define mission fragmentation as the involvement of multiple agencies in a similar 

programmatic area and program overlap as providing the same services to the same target 

groups.
Page 52 GAO-05-690 Tax Expenditures

system and can affect the net federal assistance received. Further, some 

tax filers do not appear to make the most effective use of certain educationrelated tax incentives, and we have found that some people who appear 

eligible for the tuition deduction and/or the tax credits did not claim them.67 

One reason may be that the differing income phaseouts and interactions 

among the tax credits and deductions are difficult for taxpayers to 

understand; CBO, JCT, IRS’s National Taxpayer Advocate, Treasury, and 

others have suggested ways to consolidate the education tax credits and 

deductions.

Others have also questioned the efficiency, effectiveness, and equity of 

other tax expenditures and suggested ways to design and better target 

specific provisions.

• In December 2004, the IRS National Taxpayer Advocate designated the 

complexity of the Internal Revenue Code, including the complexity of 

reporting requirements related to tax expenditures, as the most serious 

problem facing taxpayers and the IRS.68 The IRS National Taxpayer 

Advocate also recommended consolidating the various types of 

retirement saving vehicles and creating uniform rules regarding early 

withdrawals, plan loans, and portability.

• In its January 2005 report to the Senate Finance Committee, JCT staff 

presented various options to improve tax compliance and reform tax 

expenditures.69 Options include repealing some tax expenditures and 

restructuring others to simplify the law or achieve the intended purpose 

in a more fair or efficient way.

• In its February 2005 budget options compendium prepared for the 

House and Senate Budget Committees, CBO listed several options to 

67GAO, 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).

68IRS, Taxpayer Advocate Service, National Taxpayer Advocate 2004 Annual Report to 

Congress, (Washington, D.C.: December 2004).

69Joint Committee on Taxation, Options to Improve Tax Compliance and Reform Tax 

Expenditures, JCS-2-05. Prepared by the staff of the Joint Committee on Taxation. 

(Washington, D.C.: Jan. 27, 2005).
Page 53 GAO-05-690 Tax Expenditures

eliminate or restructure tax expenditures.70 Options include further 

limiting the tax benefit of itemized deductions to the 15 percent rate for 

higher-bracket taxpayers and capping itemized deductions for state and 

local taxes and charitable contributions to the amount exceeding 2 

percent of adjusted gross income.

• Finally, in December 2004 for the Senate Budget Committee, CRS 

updated its biennial compendium on tax expenditures. 71 This volume 

includes for each tax expenditure: JCT’s revenue loss estimate, the legal 

authorization, a description of the tax provision, its impact including 

distribution of benefits when available, the rationale at the time of 

adoption, assessment summarizing the arguments for and against the 

provision, citations to relevant research. According to CRS, 

congressional budget decisions will take into account the full spectrum 

of federal programs only when tax expenditures are considered in 

conjunction with direct spending programs.

Assessing the Efficiency, 

Effectiveness, or Equity of 

Tax Expenditures Can Be 

Challenging

Inadequate or missing data and difficulties in quantifying the benefits of 

some tax expenditures can impede studies of their efficiency, effectiveness, 

and equity. 72 A key challenge is that data necessary to assess how often a 

tax expenditure is used and by whom generally would not be collected on 

tax returns unless IRS needs the information to know the correct amount 

of taxes owed or is legislatively mandated to collect or report the 

information. For example, tax exclusions—including those for employerprovided health insurance and pensions which are among the largest tax 

expenditures—generally are not reported on individual taxpayers’ returns. 

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. For example:

70Congressional Budget Office, Budget Options. (Washington, D.C.: February 2005).

71U.S. Congress, Senate Committee on the Budget, Tax Expenditures: Compendium of 

Background Material on Individual Provisions, S. Prt. 108-54. Prepared by the 

Congressional Research Service (Washington, D.C.: December 2004).

72We have also noted limitations in the quality of agency performance and evaluation 

information and agency capacity to produce rigorous evaluations of effectiveness for 

federal spending programs. See GAO, Performance Budgeting: Current Developments and 

Future Prospects, GAO-03-595T (Washington, D.C.: Apr. 1, 2003).
Page 54 GAO-05-690 Tax Expenditures

• In our 2002 report on three tax expenditures meant to encourage 

employment of the disabled among other economically disadvantaged 

workers, we could not determine the amounts used to hire, retain, and 

accommodate workers with disabilities.73 We found that information on 

the work opportunity and disabled access credits was not available from 

tax data because tax returns provided only the total amount of credits 

reported, and employers could claim the work opportunity credit for 

employing other types of workers and claim the disabled access credit 

for expenditures made to accommodate customers with disabilities. 

Also, information regarding use of the barrier removal deduction for 

providing transportation or architectural accommodations was not 

available in IRS databases.

• As we reported in 2003, for one of the seven Liberty Zone tax benefits, 

the business employee credit, IRS was in the process of collecting but 

was not planning to report information about the number of taxpayers 

claiming the credit and the amount of credit claimed.74 IRS was also not 

planning to collect or report information about the use of the other six 

benefits, and taxpayers do not report these benefits as separate items on 

the existing returns. For example, taxpayers added the amount of 

depreciation they are allowed under the Liberty Zone special 

depreciation allowance benefit to other depreciation expenses and 

report their total depreciation expenses on their returns. IRS officials 

said that they do not need information on each specific benefit claimed 

to properly target their enforcement efforts.

Further, IRS’s financial management system does not currently have cost 

accounting capabilities. As a result, comparisons of the costs of 

administering existing or proposed tax expenditures with similar 

administrative costs for spending programs may be impossible. Regarding 

taxpayer compliance costs, although IRS is working to develop improved 

estimates of taxpayer compliance burden, it is not yet clear whether this 

modeling effort will provide estimates of additional compliance costs that 

may result from particular tax expenditures.

73GAO, Business Tax Incentives: Incentives to Employ Workers with Disabilities Receive 

Limited Use and Have an Uncertain Impact, GAO-03-39 (Washington, D.C.: Dec. 11, 2002).

74GAO, Tax Administration: Information Is Not Available to Determine Whether $5 

Billion in Liberty Zone Tax Benefits Will Be Realized, GAO-03-1102 (Washington, D.C.: 

Sept. 30, 2003).
Page 55 GAO-05-690 Tax Expenditures

According to IRS officials, IRS seeks to collect information necessary to 

determine whether taxpayers have accurately reported their income and 

calculated the correct amount of tax liability. By focusing on information 

essential to administering the tax code, IRS aims to ensure that taxpayers 

are not burdened unnecessarily by record keeping and reporting, and IRS 

can minimize its own administrative costs for data collection and 

processing. For tax expenditures recorded on particular lines on tax 

forms, such as deductions and credits for individual taxpayers, data on the 

use of these tax expenditures are available. IRS Statistics of Income 

Division publications detail the number of individual tax returns on which 

taxpayers claimed each deduction or credit, the total amounts claimed, and 

the distribution of claims among taxpayers by income level.

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. For example:

• Limited data are available on the prevalence and use of business-owned 

life insurance, and GAO has reported that more comprehensive data 

could be useful in assessing the tax-favored treatment of this 

investment.75 Data on the amount of tax-free income that businesses 

received from death benefits could help explain the potential effect of 

changes to the tax treatment of policies on tax revenues. Businesses 

holding the policies or insurance companies that sold them could 

provide this and other data. Several agencies, including Treasury and 

the Securities and Exchange Commission, already collect some financial 

information from businesses and insurers and could be tasked to collect 

additional data for tax policy purposes.

• In the higher education area, the Department of Education (Education) 

is unable to analyze the use of higher education tax credits or their 

effects because it lacks access to individual taxpayer data needed to 

identify users of the credits. Treasury has access to taxpayer data but 

has not used these data for evaluating the education tax credits since 

75GAO, Business-Owned Life Insurance: More Data Could Be Useful in Making Tax Policy 

Decisions, GAO-04-303, (Washington, D.C.: May 13, 2004).
Page 56 GAO-05-690 Tax Expenditures

their implementation in 1998. In 2002, GAO recommended that 

Education and Treasury collaborate in studying the impact of tax credits 

and student aid programs on postsecondary attendance, choice, 

completion, and costs.76 A key first step would be identifying 

opportunities for, and limits to, data sharing and develop a plan to 

address data needs, but little action has been taken.

• In the case of the empowerment zone, enterprise community, and 

renewal community programs, the lack of tax benefit data limits the 

ability of the Department of Housing and Urban Development (HUD) 

and the Department of Agriculture (USDA) to administer and evaluate 

the overall programs.77 We recommended that HUD, USDA, and IRS 

collaborate to (1) identify the data needed to assess the use of the tax 

benefits and the various means of collecting such data; (2) determine 

the cost-effectiveness of collecting these data, including the potential 

impact on taxpayers and other program participants; (3) document the 

findings of their analysis; and, if necessary, (4) seek the authority to 

collect the data, if a cost-effective means is available.

When data on the cost and use of tax expenditures are available or can be 

reasonably estimated and other relevant data are available, economic 

analysis can be useful in evaluating whether a tax expenditure is efficient, 

effective, or equitable. Econometric modeling analysis can estimate how a 

tax expenditure affects the prices and quantities of targeted goods and 

services and determine how taxpayers’ incomes are affected. Although 

isolating and quantifying the outcomes associated with tax expenditures is 

challenging—just as it is for spending programs, research results are useful 

in demonstrating how particular tax expenditures work or providing 

insight on ways to refine their design. For example, research has generally 

shown that the EITC effectively increases recipients’ participation in the 

labor force, particularly for single parents, and lifts millions of recipients 

out of poverty. Some tax expenditures are enacted on a temporary basis, 

specifically to provide an opportunity for evaluating their effects before 

they are extended. For example, the research tax credit, enacted on a 

76 GAO, Student Aid and Tax Benefits: Better Research and Guidance Will Facilitate 

Comparison of Effectiveness and Student Use, GAO-02-751 (Washington, D.C.: Sept. 13, 

2002).

77GAO, 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).
Page 57 GAO-05-690 Tax Expenditures

temporary basis in 1981 and extended 11 times as of 2004, was substantially 

modified in 1989 after researchers showed the original credit formula 

undercut the incentive it was intended to provide to undertake additional 

research spending.

In some cases, economic research has not yielded definitive results or was 

limited by data and methodological issues. For example, although the 

various tax expenditures aimed at encouraging saving for, among other 

things, retirement, education, and health care have resulted in substantial 

sums being placed in these tax preferred accounts, economists disagree 

about whether tax incentives, such as for IRAs, are effective in increasing 

the overall level of personal saving. In the case of the research credit, GAO 

reported in 1996 that studies done at that time provided mixed evidence on 

the amount of spending stimulated and used publicly available data that 

were not a suitable proxy for tax return data.78 To fully assess the value to 

society of the research tax credit, researchers need to look at more than 

just the amount of spending stimulated per dollar of revenue cost. 

Comparisons should include (1) the total benefits gained by society from 

research stimulated by the credit and (2) the estimated costs to society 

resulting from the collection of taxes required to fund the credit. The 

social benefits of the research conducted by individual companies include 

any new products, productivity increases, or cost reductions that benefit 

other companies and consumers throughout the economy. Although most 

economists agree that research spending can generate social benefits, the 

effects of the research on other companies and consumers are difficult to 

measure.

Ultimately, evaluation results could be used to identify how well tax 

expenditures are working, to both identify ways to better manage 

individual tax expenditures and decide how best to ensure prudent 

stewardship of taxpayers’ resources. Whether in time of deficit or surplus, 

reexamining both the spending and tax sides of the budget is essential to 

ensure the reasonableness, relevancy, and sustainability of existing 

programs and position the nation for the future. In the case of the EITC, 

Treasury and IRS are using evaluation results to identify ways of reducing 

erroneous claims, while maintaining participation among eligible claimants 

and minimizing taxpayer and IRS’s administrative burden. Additional 

evaluations of other tax expenditures may identify opportunities to retarget 

78GAO, Tax Policy and Administration: Review of Studies of the Effectiveness of the 

Research Tax Credit, GAO/GGD-96-43 (Washington, D.C.: May 21, 1996).
Page 58 GAO-05-690 Tax Expenditures

or eliminate ineffective or outdated tax expenditures. Tax expenditures, 

unless well designed to correct market failures, can distort economic 

decisions in ways that reduce economic performance from what it 

otherwise could be and thereby lower our future economic well-being. If a 

tax expenditure or group of tax expenditures is reduced or eliminated, any 

resulting increase in tax revenues could be offset if policymakers deem that 

to be appropriate fiscal policy. In any event, in order to raise a given 

amount of federal revenue, tax rates must be raised higher than they 

otherwise need to be due to revenue losses from tax expenditures. Thus, 

the net change after tax rate adjustments could, depending on overall 

congressional priorities and preferences, result in tax reductions for many 

taxpayers in place of the preferential treatment for some taxpayers. 

According to a recent estimate, a broad-based income tax system—

eliminating basically all credits, deductions, special rates, exclusions for 

employer-provided fringe benefits and employee contributions to 

retirement account as well as eliminating the AMT—-could raise about the 

same amount of revenue as the current income tax system while lowering 

tax rates by about one-third.79

The Executive Branch Has 

Made Little Progress Since 

1994 to Improve Scrutiny of 

Tax Expenditures

Although OMB and Treasury in 1994 supported expanding federal reviews 

of tax expenditures, the Executive Branch made little progress over the 

past decade to integrate tax expenditures in the budget presentation and to 

incorporate tax expenditures under review processes that apply to 

spending programs, as we recommended in 1994. Even though the sum of 

tax expenditure outlay-equivalent estimates is about the same magnitude 

as discretionary spending overall and greater than outlays in some budget 

functions, this is not readily visible to policymakers and the public because 

tax expenditures are not integrated in the budget presentation. Since their 

initial efforts to outline a framework for evaluating tax expenditures and 

preliminary performance measures, OMB and Treasury have largely ceased 

to make progress and have retreated from setting a schedule for evaluating 

tax expenditures. One of the key impediments to moving forward in 

conducting reviews of tax expenditures’ performance is the continuing lack 

79See the President’s Advisory Panel on Federal Tax Reform, “Understanding Tax Bases: 

Staff Presentation,” (presentation before the Panel’s public meeting, Washington, D.C., July 

20, 2005, http://taxreformpanel.gov/meetings/docs/understanding_tax_bases.ppt

(downloaded September 13, 2005). The calculations for the presentation were produced by 

the U.S. Department of the Treasury, Office of Tax Analysis, at the request of the Panel. The 

broad income tax base scenario assumes integration of individual and corporate income 

taxes with the corporate tax rate set equal to the top individual rate.
Page 59 GAO-05-690 Tax Expenditures

of clarity about the roles of OMB, Treasury, IRS, and departments or 

agencies with outlay program responsibilities. So far, GPRA plans and 

reports are underutilized as a way to provide more information about the 

performance of tax expenditures and their contributions relative to 

spending programs. Tax expenditures are not subject to annual budget 

reviews, and OMB has not generally subjected them to scrutiny under 

PART in tandem with spending programs sharing common, crosscutting 

goals.

Tax Expenditures Are Not 

Integrated in the Annual Budget 

Presentation or Financial 

Statement Reporting

Integrating tax expenditure costs in the annual budget presentation is 

crucial to providing a comprehensive picture of federal resources to 

facilitate reexamining the base. As a start in acting on our 1994 

recommendation, OMB began presenting revenue loss sums for tax 

expenditures alongside outlays and credit activity for each budget function 

in the fiscal year 1998 budget. These summary tables were a useful starting 

point in highlighting the relative magnitude of tax expenditures across 

mission areas. However, OMB discontinued the reporting practice after the 

fiscal year 2002 budget, and instead, the Analytical Perspectives contains 

Treasury’s list of tax expenditures with associated revenue loss estimates 

for each one. Isolating tax expenditure cost information in a supplemental 

volume, however, provides a less comprehensive picture for policymakers 

and the public to compare all of the policy tools used within a mission area, 

such as health care or energy, because all the tools are not displayed 

together in the budget. OMB has demonstrated that it is feasible to display 

tax expenditure totals alongside spending programs in each budget 

function. Such a display is a first step in providing the public and 

policymakers with a more useful and accurate picture of the extent of 

federal support and activities.

GAO also recommended in 1994 that the budget presentation include, to 

the extent possible, information to highlight for policymakers and the 

public the effectiveness, distributional equity, and economic efficiency for 

all federal resources allocated in a mission area. In the tax expenditure 

chapter in Analytical Perspectives, OMB added a section outlining possible 

performance measures developed by Treasury, which could be used to 

present information about the performance of tax expenditures. Although 

this overview was initially introduced in the 1997 budget and expanded in 

the 1999 budget, no performance information is actually displayed. OMB 

states that the measure examples provided are “illustrative” in nature, 

acknowledges that the performance measure discussion “although broad, 

is nonetheless incomplete,” and noted that many tax expenditures are not 

explicitly cited.
Page 60 GAO-05-690 Tax Expenditures

The Chief Financial Officers Act,80 as expanded by the Government 

Management Reform Act of 1994,81 required federal agencies to prepare 

annual audited financial statements beginning in fiscal year 1996. OMB 

Circular A–136 Financial Reporting Requirements requires agencies to 

combine the annual GPRA program performance report with the financial 

statements and other information in a combined performance and 

accountability report. In accordance with generally accepted accounting 

principles, the basis on which federal agencies are required to prepare their 

financial statements, tax expenditures may be presented as other 

accompanying information. The Federal Accounting Standards Advisory 

Board (FASAB), which promulgates federal accounting standards, 

recognized that tax expenditures, which can be large in relation to 

spending programs that are measured under federal accounting standards, 

may not be fully considered in entity reporting. FASAB based its views, in 

part, on the fact that, in some cases, the association of tax expenditures 

with particular programs is not clear and the information is available 

elsewhere. The Board agreed to permit reporting entities to present, as 

other accompanying information, information on tax expenditures that the 

reporting entity considers relevant to its programs, if suitable explanations 

and qualifications are provided. As a result, tax expenditure amounts, 

which in some cases are larger than similar spending programs, are not 

required to be disclosed to the public as part of federal agencies’ financial 

statements nor are they disclosed in the consolidated financial statements 

of the federal government. Similarly, OMB’s guidance for the performance 

and accountability reports does not require reporting of tax expenditure 

information in agencies’ reports. Reporting such information would ensure 

greater transparency of and accountability for tax expenditures.

Progress on Developing 

Structure for Reviewing Tax 

Expenditures’ Performance Has 

Stalled

OMB has not designed and implemented a structure for conducting reviews 

of tax expenditures’ performance, as we recommended in 1994. Our 

recommendation was consistent with language in the Senate Committee on 

Government Affairs’ Report82 on GPRA, which specified that the Director 

of OMB was to establish an appropriate framework for periodic analyses of 

the effects of tax expenditures in achieving performance goals. To 

80Pub. L. No. 101-576, Nov. 15, 1990.

81Pub. L. No. 103-356, Oct. 13, 1994.

82S. Rep. No. 103-58, p. 29 (1993).
Page 61 GAO-05-690 Tax Expenditures

significantly increase the oversight and analysis of tax expenditures, the 

committee report also called for a schedule for periodic tax expenditure 

evaluations.

The ultimate goal of designing a structure for conducting performance 

reviews of tax expenditures was to begin developing and presenting 

performance information in the federal budget that would help 

demonstrate the relative effectiveness, efficiency, and equity of federal 

outlays and tax expenditure efforts within a mission area. In our 1994 

report, we emphasized that in designing the structure for tax expenditure 

performance reviews, OMB should consider 

• the roles of OMB, Treasury, and departments or agencies with outlay 

program responsibilities in assessing the performance of tax 

expenditures and their relationship and interaction with related 

spending programs; and

• which tax expenditures and outlay programs are related or interact and 

should be jointly considered.

GAO recommended that OMB and Treasury conduct case studies of the 

proposed review structure to identify (1) successful methods agencies 

devise for reviewing tax expenditures’ performance, (2) how best to report 

the results of these reviews, and (3) how to ensure that adequate resources 

are available for such reviews.

Although OMB, working with Treasury, took a number of steps consistent 

with our recommendation, it has not resolved the roles of OMB, Treasury, 

and departments or agencies with outlay program responsibilities; 

established a schedule for reviewing tax expenditures; or addressed 

lessons learned from tax expenditure case study reviews that Treasury 

performed. If the Executive Branch cannot define roles and set firm plans, 

it will continue to face additional challenges in developing objective, 

measurable, and quantifiable performance measures for tax expenditures 

that support federal missions and goals.

Defining roles of agencies. One of the key impediments to moving 

forward in conducting reviews of tax expenditures’ performance is the 

continuing lack of clarity about the roles of OMB, Treasury, IRS, and 

departments or agencies with outlay program responsibilities. According 

to officials at OMB, it is difficult to determine which agencies in addition to 

Treasury and IRS have jurisdiction over particular tax expenditures. For 
Page 62 GAO-05-690 Tax Expenditures

example, one OMB official noted that tax expenditures meant to encourage 

savings were not the purview of any single agency. OMB officials also 

stated that OMB does not have the expertise or resources to conduct its 

own comprehensive analyses of tax expenditures, so individual agencies 

should take responsibility for identifying tax expenditures that affect their 

missions, with Treasury’s Office of Tax Analysis leading efforts to evaluate 

tax expenditures.

Without clarification on the roles of federal agencies, inaction, overlap or 

inconsistency in evaluating tax expenditures can occur. For example, in 

2002 we reported that gaps existed in monitoring the relative effectiveness 

of Title IV grants and loans and the HOPE and Lifetime Learning tax credits 

in promoting postsecondary education.83 The lack of collaboration 

between the Department of Education and the Treasury left little 

information available to help Congress weigh the relative effectiveness of 

grants, loans, and tax credits. Although data and methodological 

challenges make it difficult to isolate the impact of these tools, some 

academic researchers have used statistical techniques and research 

designs to mitigate these challenges. We recommended in 2002 that the 

departments develop a plan to share data and collaborate to provide 

Congress with evidence about the impact of higher education tax credits 

and student aid, but little action has been taken to implement the 

recommendation.

To define the roles of federal agencies in reviewing tax expenditures, OMB, 

working with Treasury and other federal agencies, will need to exercise 

judgment in resolving how to address tax expenditures spanning mission 

areas. In some cases, Treasury could take the lead, such as in evaluating 

tax expenditures that broadly support investment and saving, or other 

agencies could work with Treasury to evaluate tax expenditures that 

directly affect their mission areas. For example, an evaluation of the 

various energy supply tax expenditures might involve both Treasury and 

the Department of Energy in assessing their effects on increasing 

production as well as on energy security and the environment.

Establishing a schedule for evaluations. Periodic reviews of tax 

expenditures are also impeded because OMB has not developed a schedule 

for such reviews. In its 1997 GPRA report and again in the fiscal year 1999 

budget, OMB set the expectation that the Executive Branch would lay out a 

83GAO-02-751.
Page 63 GAO-05-690 Tax Expenditures

schedule for tax expenditure evaluations. Beyond three initial pilot studies 

in 1997, however, no schedule has been set for further evaluations or case 

studies to explore methods and resource needs for measuring and 

reporting tax expenditure performance.

As the roles of federal agencies are clearly defined, OMB and Treasury, 

working with other agencies, would be positioned to establish a schedule 

for tax expenditure evaluations. Opportunities exist to develop a strategic 

approach to the selection and prioritization of areas in allocating scarce 

evaluation resources. In our January 2004 report on OMB’s PART, we 

recommended that OMB target PART assessments based on such factors as 

the relative priorities, costs, and risks associated with related clusters of 

programs and activities and that OMB select similar programs for review in 

the same year to facilitate comparisons and tradeoffs.84 Similar 

considerations would be useful in setting a schedule for tax expenditure 

evaluations.

Testing the evaluation framework. Although OMB outlined an initial 

framework for tax expenditure analysis in its May 1997 GPRA report to the 

President and Congress, OMB has not taken steps to address lessons 

learned from tax expenditure case study reviews that Treasury performed. 

OMB’s framework focused on the methodology that could be used to assess 

the performance of tax expenditures. OMB emphasized that developing a 

framework that is comprehensive, accurate, and flexible to reflect the 

objectives and effects of the wide range of tax expenditures would be a 

significant challenge. The initial framework for evaluating tax 

expenditures was expected to follow the basic structure for performance 

measurement—inputs, outputs, and outcomes. For tax expenditures, the 

primary input is the revenue loss. The outputs are the quantitative or 

qualitative measures of goods and services, or changes in investment and 

income, produced by the tax expenditures. Outcomes, in turn, were 

defined as the changes in the economy, society, or environment that the tax 

expenditures aim to accomplish.

In 1997, Treasury did three pilot evaluations of selected tax expenditures to 

test the evaluation methods that OMB had described in its framework for 

tax expenditure analysis. In addition to seeking to learn lessons about 

applying the framework, the pilots were also intended to help identify 

84GAO, Performance Budgeting: Observations on the Use of OMB’s Program Assessment 

Rating Tool for the Fiscal Year 2004 Budget, GAO-04-174 (Washington, D.C.: Jan. 30, 2004).
Page 64 GAO-05-690 Tax Expenditures

resource needs for evaluating tax expenditures. Treasury selected one 

pilot each to be done by the individual, corporate, and international units 

within its Office of Tax Analysis. Results from the three tax expenditure 

pilots—the exclusion for worker’s compensation benefits, the tax credit for 

non-conventional fuels, and the tax exclusion for certain amounts of 

income earned by Americans living abroad85—were summarized alongside 

each tax expenditure’s description in the tax expenditure chapter of the 

Analytical Perspective volume of the fiscal year 1999 budget. Although 

OMB originally expected to complete additional evaluations to refine the 

tax expenditure framework and improve performance measures, no further 

pilot evaluations have been completed. In reporting the results of these 

pilots, Treasury said that much of the data needed for thorough analysis 

was not available and that in at least one case, it was difficult to identify a 

clear purpose for the tax expenditure. Treasury did not discuss the 

resources that would be needed to continue doing such evaluations.

However, OMB officials we interviewed reiterated that the data availability 

issues raised in the 1997 pilots remain a major challenge, and data 

constraints limit the assessment of the effectiveness of many tax 

expenditures. To improve the data available to assess the effects of some 

major tax expenditures, principally those aimed at personal savings, 

Treasury and IRS are developing a data set that is to follow a sample of 

individual income taxpayers over at least 10 years, beginning with tax year 

1999. The new data set aims to capture the changing demographic and 

economic circumstances of individual taxpayers for use in analyzing the 

effects of changes in tax law over time. In addition to the panel sample, 

OMB reported in the fiscal year 2006 budget that it is working with 

Treasury’s Office of Tax Analysis and other agencies to improve data 

available for assessment of saving-related tax expenditures. No time frame 

was given in the 2006 budget for when any results will be reported.

The challenges in producing credible performance information and the 

ability of federal agencies to produce evaluations of their programs’ 

effectiveness are not unique to tax expenditures. As our work on GPRA 

and PART implementation shows, the credibility of performance data has 

85Revenue loss estimates for the three tax expenditures included in Treasury’s first pilot 

study amounted to approximately $7.8 billion (in 2004 dollars) or 1.4 percent of total 

revenue loss in fiscal year 1997; the three amounted to $9.2 billion or 1.3 percent of total 

revenue loss for fiscal year 2004.
Page 65 GAO-05-690 Tax Expenditures

been a long-standing weakness.86 Developing and reporting credible 

information on outcomes achieved through federal programs remains a 

work in progress. In past reports, we have identified several promising 

ways agencies can maximize their evaluation capacity. For example, 

careful targeting of federal evaluation resources on key policy or 

performance questions and leveraging federal and nonfederal resources 

show promise for addressing key questions about program results. Other 

ways agencies might leverage their current evaluation resources include 

adapting existing information systems to yield data on program results, 

drawing on the findings of a wide array of evaluations and audits, making 

multiple use of an evaluation’s findings, mining existing databases, and 

collaborating with state and local program partners to develop mutually 

useful performance data.

Statutory Impetus for Tax 

Expenditure Reviews Is 

Underutilized 

Congressional expectations for reviews of tax expenditures in connection 

with agencies’ reviews of related outlay and other programs generally have 

not been met. Enacted in 1993, GPRA is designed to inform congressional 

and executive decisionmaking by providing objective information on the 

effectiveness and efficiency of federal programs and spending.87 GPRA 

requires agencies to measure performance toward the achievement of 

annual goals and report on their progress in annual program performance 

reports. Through the strategic planning requirement, GPRA requires 

federal agencies to consult with the Congress and key stakeholders to 

regularly reassess their missions and strategic goals as well as the 

strategies and resources they will need to achieve their goals. Although 

GPRA offers a promising opportunity for the Executive Branch to develop 

useful information about the results of tax expenditures, agencies are not 

using their GPRA strategic plans and annual performance plans and reports 

to assess tax expenditures and their performance relative to spending 

programs contributing to the same strategic goals and objectives. Without 

86GAO has suggested various approaches to addressing this and other challenges. See GAO, 

The Government Performance and Results Act: 1997 Governmentwide Implementation 

Will Be Uneven, GAO/GGD-97-109 (Washington, D.C.: June 2, 1997); and GAO, ResultsOriented Government: GPRA Has Established a Solid Foundation for Achieving Greater 

Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004).

87GPRA is the centerpiece of a statutory framework for helping resolve long-standing 

management problems that have undermined the federal government’s efficiency and 

effectiveness. The framework also includes the Chief Financial Officers Act of 1990 as 

amended by the Government Management Reform Act of 1994 and other reform legislation 

such as the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996. For more 

information on the Government Performance and Results Act, see GAO-04-38.
Page 66 GAO-05-690 Tax Expenditures

integrating tax expenditures that have a direct bearing on federal missions 

and goals, policymakers may not have complete information to fully 

evaluate whether the government is achieving results or how the 

performance of tax expenditures interact with or compare to related 

spending programs.

The Senate Governmental Affairs Committee Report on GPRA stated that 

tax expenditures should be taken into consideration in a comprehensive 

examination of government performance. The report stated that a 

schedule for periodically assessing the effects of specific tax expenditures 

in achieving performance goals should be included in the annual 

performance plans and that annual performance reports would 

subsequently be used to report on these tax expenditure assessments. In 

addition, the report noted that these assessments should consider the 

relationship and interactions between spending programs and tax 

expenditures and the effects of tax expenditures in achieving federal 

performance goals.

Although GPRA expanded the supply of performance information 

generated by federal agencies, evaluating crosscutting federal efforts 

continues to be a challenge. GPRA requires the President to include in his 

annual budget submission a federal government performance plan. 

Congress intended that this plan provide a single cohesive picture of the 

annual performance goals for the fiscal year.88 The governmentwide 

performance plan could help Congress and the Executive Branch address 

critical federal performance and management issues, including redundancy 

and other inefficiencies in how we do business. However, this provision 

has not been fully implemented, and the current agency-by-agency focus of 

the budget does not have a broad, integrated perspective of planned 

performance on governmentwide outcomes. As envisioned by Congress, 

the governmentwide plan could relate and address the contributions of 

alternative federal strategies, including tax expenditures, to 

governmentwide goals. Agencies’ annual performance plans and reports 

could highlight crosscutting program efforts and provide evidence of the 

coordination of those efforts. We have previously recommended that OMB 

fully implement GPRA’s requirement to develop a governmentwide plan to 

88S. Rep. No. 103-58, p. 29 (1993).
Page 67 GAO-05-690 Tax Expenditures

provide a more cohesive picture of the federal government’s goals and 

strategies.89 

Prior to a 2003 revision, OMB’s Circular A-11 guidance on GPRA reporting 

stated that descriptions should be provided for use of tax expenditures in 

annual performance plans when achievement of program or policy goals is 

dependent upon these governmental actions and annual performance 

reports must include the results of any assessment of how specific tax 

expenditures affect achieving its performance goals.90 However, the 

circular also stated that few agencies were responsible for such analyses. 

In addition, as part of a broader A-11 revision update, OMB streamlined its 

GPRA guidance in 2003 and no longer describes tax expenditures as part of 

guidance on performance plans and performance reports in the circular. 

According to OMB, it is up to individual agencies to decide whether to 

address tax expenditures in their GPRA reports and that many agencies 

focus on outlay programs over which they have more direct control. OMB 

officials told us that some agencies see tax expenditures as closely related 

to what they do and some do not, or agencies might not have enough 

knowledge about tax expenditures to consider them carefully. Our review 

of selected GPRA Performance and Accountability reports indicated the 

acknowledgement of tax expenditures in achieving federal performance 

goals varied by agency. For example:

• The Department of Energy (DOE) and HUD both acknowledged tax 

expenditures or tax policy as factors that affect agency goals. However, 

the DOE’s fiscal year 2004 report provided no further discussion on how 

the tax expenditures contributed to achieving the agencies’ 

performance goals. HUD’s fiscal year 2004 report acknowledged the tax 

incentives for renewal communities, empowerment zones, and 

enterprise communities as helping to achieve its objective of providing 

capital resources to improve economic conditions in distressed 

communities. As discussed previously, the outlay-equivalent value for 

tax expenditures amounts to more than other spending in the energy as 

well as the commerce and housing credit mission areas.

89GAO-04-38.

90OMB, “Preparation and Submission of Strategic Plans, Annual Performance Plans, and 

Annual Program Performance Report”, Part 6 of Circular A-11, Preparation, Submission, 

and Execution of the Budget (Washington, D.C.: 2002).
Page 68 GAO-05-690 Tax Expenditures

• The fiscal year 2004 reports released by the Department of Commerce 

(Commerce), the Department of Veterans Affairs, and the Department of 

Health and Human Services (HHS) do not mention tax expenditures at 

all, even though tax expenditures exist under the different mission areas 

related to these departments. For instance, several large tax 

expenditures, such as capital gains and accelerated depreciation, are 

listed by Treasury as related to the Commerce mission area, but it is 

unclear how, if at all, these tax expenditures relate to Commerce’s 

performance goals. Also, the income tax exclusion for employerprovided health care, the largest single tax expenditure, clearly 

intersects with HHS's mission to assure access to health care. 

• Treasury’s fiscal year 2004 report explicitly identified a few tax 

expenditures—the New Markets Tax Credit and a new health coverage 

tax credit—as related to achieving its strategic objective to stimulate 

U.S. economic growth. In the context of its strategic objective to 

improve and simplify the tax code, Treasury reported on its efforts to, 

among other things, simplify the EITC and consolidate the higher 

education tax benefits. Treasury also reported on its efforts to improve 

determination of EITC eligibility and educate taxpayers about this 

provision. Treasury did not include information about tax expenditures 

as other accompanying information in the financial statement in its 2004 

report.

Tax Expenditures Are Not 

Subject to Annual Budget 

Reviews

Tax expenditures have not been incorporated into Executive Branch 

budget reviews, as we recommended in 1994. We recommended that OMB 

use information on outlay programs and tax expenditures to make 

recommendations to the President and Congress about the most effective 

methods for accomplishing federal objectives. We concluded that better 

targeting by Congress and the Executive Branch of all federal spending and 

subsidy programs could save resources and increase economic efficiency 

through (1) better coordination of spending programs with tax 

expenditures; (2) reduction of overlap and inconsistencies among all 

federal subsidy programs; and (3) encouragement of trade-offs among tax 

expenditures, outlays, and loans.

The congressional budget process is the annual vehicle through which 

Congress articulates both an overall fiscal stance—overall targets for 

spending and revenue—and its priorities across various broad categories. 

The process provides the overall constraints for spending and revenue 

actions by Congress for each year and the rules of procedure that can be 

used to constrain new entitlement and tax legislation not assumed in the 
Page 69 GAO-05-690 Tax Expenditures

annual budget resolution. The conflicts and uncertainties entailed in 

budgeting and policymaking are often mitigated by focusing decisions on 

incremental changes in resources each year. As a result, this incremental 

process focuses disproportionate attention on proposed changes to 

existing programs and proposals for new programs, with the base of 

programs often being taken as “given.” Moreover, the process routinely 

examines only the one-third of federal spending subject to the annual 

appropriations process. Unlike discretionary spending programs, which 

are subject to periodic reauthorization and annual appropriation, tax 

expenditures—like entitlement programs—are permanent law and are 

generally not subject to a legislative process that would ensure systematic 

annual or periodic review. In addition, the budget rules that were grounded 

in statute—including discretionary spending caps, pay-as-you-go (PAYGO) 

limits on mandatory spending and tax cuts—and enforced by executive 

actions if violated, expired at the end of fiscal year 2002. Before their 

expiration, PAYGO procedures restricted Congress’ ability to add new tax 

expenditures or expand existing ones unless offsetting funds could be 

raised. Because tax provisions are not as visible in the budget as spending 

programs, there is an incentive for policymakers to use tax provisions 

rather than spending programs to accomplish programmatic ends. 

However, both have a negative effect on the government’s “bottom-line.” 

Reinstituting budget enforcement mechanisms, such as discretionary 

spending caps, PAYGO discipline on both the spending and tax side, and 

fiscal benchmarks, could help the President and Congress sort out the 

many claims on the federal budget, including tax expenditures.

Within the Executive Branch, OMB has not used its PART process, which is 

central to the Executive Branch’s budget and performance integration 

initiative,91 to systematically review tax expenditures and promote joint 

and integrated reviews of tax and spending programs sharing common, 

crosscutting goals. OMB describes PART as a diagnostic tool meant to 

provide a consistent approach to assessing federal programs as part of the 

executive budget formulation process. It applies 25 questions to all 

91GAO, 21st Century Challenges: Performance Budgeting Could Help Promote Necessary 

Reexamination, GAO-05-709T (Washington, D.C.: June 14, 2005). For a detailed 

examination of PART, see GAO-04-174. Another significant element of the performance and 

budget integration initiative is efforts to restructure budgets. See GAO, Performance 

Budgeting: Efforts to Restructure Budgets to Better Align Resources with Performance, 

GAO-05-117SP (Washington, D.C.: February 2005).
Page 70 GAO-05-690 Tax Expenditures

“programs”92 under four broad topics: (1) program purpose and design, 

(2) strategic planning, (3) program management, and (4) program results 

(i.e., whether a program is meeting its long-term and annual goals) as well 

as additional questions that are specific to one of seven mechanisms or 

approaches used to deliver the program.93 PART is designed to be 

evidence-based, drawing on a wide array of information, including 

authorizing legislation, GPRA strategic plans and performance plans and 

reports, financial statements, inspectors general and GAO reports, and 

independent program evaluations. Drawing on available performance and 

evaluation information, the PART questionnaire attempts to determine the 

strengths and weaknesses of federal programs with a particular focus on 

individual program results and improving outcome measures. 

Since the fiscal year 2004 budget cycle, OMB has applied PART to 607 

programs (about 60 percent of the federal budget), and given each program 

one of four overall ratings: (1) “effective,” (2) “moderately effective,” 

(3) “adequate,” or (4) “ineffective” based on program design, strategic 

planning, management, and results. A fifth rating, “results not 

demonstrated,” was given—independent of a program’s numerical score—

if OMB decided that a program’s performance information, performance 

measures, or both were insufficient or inadequate. Over the next 2 years, 

OMB plans to assess nearly all remaining Executive Branch spending 

programs.94

Whereas OMB, through its development and use of PART, has provided 

agencies with a powerful incentive for improving data quality and 

availability on the spending side, relatively little progress has been made in 

evaluating the effectiveness of tax expenditures. So far, OMB has used 

92 There is no standard definition for the term “program.” For purposes of PART, OMB 

described the unit of analysis (program) as (1) an activity or set of activities clearly 

recognized as a program by the public, OMB, and/or Congress; (2) having a discrete level of 

funding clearly associated with it; and (3) corresponding to the level at which budget 

decisions are made.

93The seven major categories are competitive grants, block/formula grants, capital assets 

and service acquisition programs, credit programs, regulatory-based programs, direct 

federal programs, and research and development programs.

94For the limited exceptions, the Administration is considering alternative methods and 

timelines for assessment of programs with limited impact and large activities where it is 

difficult to determine an appropriate unit of analysis.
Page 71 GAO-05-690 Tax Expenditures

PART to address tax expenditures in only two cases—the EITC compliance 

initiative and the New Markets Tax Credit (NMTC).95

• For the EITC, which has outlays for the refundable portion, the direct 

federal spending PART instrument was used to evaluate IRS’ initiative to 

improve the payment accuracy rate for the EITC—and not the 

refundable EITC itself. OMB rated the compliance initiative as 

“ineffective” in the fiscal year 2004 budget because data showed no 

progress in reducing the high rates of erroneous payments. The review 

did not evaluate the effects of the EITC on workforce participation or 

examine its contribution relative to other federal programs aimed at 

reducing poverty.

• The NMTC, which is administered like a grant by CDFI, was evaluated 

as part of OMB’s crosscutting review of community and economic 

development programs. OMB rated the NMTC as “adequate” and 

reported in 2005 that CDFI had established meaningful long-term and 

annual performance measures but that data were not yet available to 

evaluate the effectiveness of the NMTC or establish baselines for the 

performance measures.

We have urged a more comprehensive, consistent, and integrated approach 

to evaluating all programs relevant to common goals—encompassing 

spending, tax expenditures, and regulatory programs—using a common 

framework. Such an analysis is necessary to capture whether a program 

complements and supports other related programs, whether it is 

duplicative and redundant, or whether it actually works at cross-purposes 

to other initiatives. OMB officials we interviewed said that OMB would 

need Treasury’s assistance to determine what information or criteria to 

include in a PART instrument tailored to examine tax expenditures. As of 

July 2005, OMB said that it was planning to review the health insurance tax 

credit program next year but that it has not decided whether the PART 

review will be limited to administration or will also cover the program’s tax 

policy purpose.

95The NMTC program issues federal tax credits to private sector entities in return for 

investments in low-income communities, such as development or rehabilitation of real 

estate projects.
Page 72 GAO-05-690 Tax Expenditures

Conclusions As we move forward in shaping government for this century, the federal 

government cannot accept all of its existing programs, policies, functions, 

and activities as “givens.” Outmoded commitments and operations 

constitute an encumbrance on the future that can erode the capacity of the 

nation to better align its government with the needs and demands of a 

changing world and society. Reexamining the base of all major existing 

federal spending and tax programs, policies, functions, and activities by 

reviewing their results and testing their continued relevance and relative 

priority for our changing society is an important step in recapturing our 

fiscal flexibility and bringing the panoply of federal activities into line with 

21st century trends and challenges. The decisions we face involve difficult 

choices about the appropriate size and role of the federal government and 

how to finance the federal government. The revenues forgone through tax 

expenditures reduce resources available to fund other federal activities or 

they require higher tax rates to raise a given amount of revenue. Reviewing 

their results and testing their continued relevance and relative priority is an 

important step in the process towards fiscal responsibility and national 

renewal. Such a fundamental review of major programs, policies, and 

activities, including tax expenditures, can serve the vital function of 

updating the federal government’s approach to meet current and future 

challenges.

Regular and systematic evaluation will be necessary to inform policy 

decisions about the efficiency, effectiveness, and equity of tax expenditures 

or whether they are the best tool for accomplishing federal objectives 

within a functional area. Beginning the governmentwide reexamination 

process now would enable decisionmakers to be more strategic and 

selective in choosing areas for review over a period of years. Reexamining 

selected parts of the budget base over time may make the reviews more 

feasible and less burdensome, and it would allow decisionmakers to focus 

on all federal efforts—discretionary spending, mandatory spending, and 

tax expenditures—sharing common goals.

Unfortunately, over a decade has passed since Congress encouraged 

systematic reviews of tax expenditures and since we made 

recommendations to facilitate such reviews and to display information on 

tax expenditures in the federal budget in a manner that enables 

policymakers to look at resource commitments across related outlays and 

tax expenditures. Although specific tax expenditures, such as the EITC 

and Liberty Zone tax benefits, have received varying degrees of scrutiny, 

efforts to date have not provided the Congress and others with an 
Page 73 GAO-05-690 Tax Expenditures

integrated perspective on the extent to which programs and tools—

including tax expenditures—contribute to national goals and position the 

government to successfully meet 21st century demands. In addition, the 

lack of a requirement to disclose tax expenditures in agencies’ annual 

performance and accountability reports may result in important 

performance and cost related data not being fully considered with other 

federal resources allocated to achieve similar objectives. Although 

challenges must be overcome to provide systematic reviews of tax 

expenditures, these challenges cannot be addressed absent effective 

leadership within the Executive Branch. Accordingly, we are making 

several recommendations to OMB.

Recommendations for 

Executive Action

To ensure that policymakers and the public have the necessary information 

to make informed decisions and to improve the progress toward exercising 

greater scrutiny of tax expenditures, we recommend that the Director of 

OMB, in consultation with the Secretary of the Treasury, take the following 

four actions: 

• resume presenting tax expenditures in the budget together with related 

outlay programs to show a truer picture of the federal support within a 

mission area;

• develop and implement a framework for conducting performance 

reviews of tax expenditures. In developing the framework, 

(1) determine which agencies will have leadership responsibilities to 

review tax expenditures, how reviews will be coordinated among 

agencies with related responsibilities, and how to address the lack of 

credible performance information on tax expenditures; (2) set a 

schedule for conducting tax expenditure evaluations; (3) re-establish 

appropriate methods to test the overall evaluation framework and make 

improvements as experience is gained; and (4) to identify any additional 

resources that may be needed for tax expenditure reviews.

• develop clear and consistent guidance to Executive Branch agencies on 

how to incorporate tax expenditures in strategic plans, annual 

performance plans, and performance and accountability reports, to 

provide a broader perspective and more cohesive picture of the federal 

government’s goals and strategies to address issues that cut across 

Executive Branch agencies; and
Page 74 GAO-05-690 Tax Expenditures

• require that tax expenditures be included in the PART process and any 

future such budget and performance review processes so that tax 

expenditures are considered along with related outlay programs in 

determining the adequacy of federal efforts to achieve national 

objectives.

Agency Comments and 

Our Evaluation

We provided a draft of this report to OMB, Treasury, and IRS for their 

review and comments. We received written comments from OMB’s 

Associate Director for Economic Policy in a letter dated September 2, 2005. 

These comments are reprinted in app. II along with our analysis of certain 

issues raised by OMB. OMB disagreed with our recommendations and 

several of our findings, and also raised concerns about our use of 

Treasury’s tax expenditure estimates. Where appropriate, we made 

changes in our report in response to these comments. The Secretary of the 

Treasury did not submit comments, instead deferring to OMB. IRS staff 

provided a technical correction that we incorporated.

In commenting on our report, OMB raised concerns about our use of tax 

expenditure estimates developed by Treasury and reported in the annual 

federal budget. For example, OMB commented that we accepted 

uncritically the concept of tax expenditures first advanced in the 1960s and 

said that we ignored limitations about the “volume” of total tax 

expenditures. To the contrary, the background section of our draft report, 

as well as several pages in app. III, clearly identified issues related to the 

tax expenditure concept, including that characterizing individual 

provisions as tax expenditures is a matter of judgment, and that 

disagreements exist about classifying what should be included in the 

income tax base. Pursuant to the Congressional Budget Act of 1974, the 

term tax expenditure, as our draft stated, has been used in the federal 

budget for three decades, and the tax expenditure concept—while not 

precisely defined—is nevertheless a valid representation of one tool that 

the federal government uses to allocate resources. Regarding the “volume” 

of tax expenditures, we acknowledged throughout our draft report 

limitations in the methodology of summing the individual tax expenditures. 

To provide an example of the extent that interaction effects among tax 

expenditure estimates can affect summing them, at our request, Treasury 

calculated total tax expenditures for five itemized deductions that took 

these effects into account; we included this information in our draft report. 

As our report stated, tax expenditure estimates—both those published in 

the budget as well as those produced by JCT—are the best and only data 

available to measure the value of tax expenditures and make comparisons 
Page 75 GAO-05-690 Tax Expenditures

to other spending programs. In our opinion, summing the estimates 

provides perspective on the use of tax expenditures as a policy tool and 

represents a useful gauge of the general magnitude of government 

subsidies carried out through the tax code.

OMB also stated that we reported that more attention should be given to 

tax expenditures due to the severity of the nation’s long-term fiscal 

imbalance and stated that the Administration rejects any attempt to 

address the long-term fiscal imbalance with tax increases. To the contrary, 

we believe that tax expenditures, like other federal programs and activities, 

should be reevaluated as to their effectiveness and continued relevance as 

part of a periodic reexamination of what the federal government does and 

how it does business. Although the long-term fiscal gap heightens the need 

to ensure resources are not wasted, this reexamination would be 

appropriate regardless of the fiscal position. Further, OMB’s implication 

that focusing more attention on tax expenditures would automatically 

increase taxes is unfounded. As our report clearly stated, for any given 

level of revenue, the revenues forgone through tax expenditures require 

higher tax rates to obtain a given amount of revenue. Thus, if the 

evaluations of tax expenditures we call for lead to reducing or eliminating 

some tax expenditures, the net change after rate adjustments could, 

depending on overall congressional priorities and preferences, result in tax 

reductions for many taxpayers. We adjusted sections of our report to 

reinforce the point that reviewing tax expenditures is consistent with good 

stewardship of taxpayers’ resources and does not automatically result in 

tax increases depending on other related changes. At the same time, our 

current and projected fiscal imbalance serves to reinforce the need for 

reassessing all activities. We also added a recent estimate calculated by the 

Department of the Treasury for the President's Advisory Panel on Federal 

Tax Reform which showed that a tax system where basically all tax 

expenditures were eliminated could raise the same amount of revenue as 

the current tax system while lowering tax rates by about a third.

OMB also stated that information on tax expenditures is not useful for 

budgeting and that tax expenditures have never been included in the 

congressional budget process. To the contrary, the tax expenditure list is 

legally required under the 1974 Congressional Budget Act and, before the 

expiration of the Budget Enforcement Act in 2002, PAYGO procedures 

restricted Congress’ ability to add new tax expenditures or expand existing 

ones unless offsetting funds could be raised. Whereas OMB favors 

reporting tax expenditures separately from the rest of the budget, we 

believe an integrated presentation is also useful to show the relative 
Page 76 GAO-05-690 Tax Expenditures

magnitude of tax expenditures compared to spending and credit programs 

across mission areas. This is not a recommendation to equate tax 

expenditures with outlays. We are recommending that OMB focus on 

integrating tax expenditures in the President’s budget presentation to show 

a truer picture of federal support in a mission area and on including tax 

expenditures under budget and performance review processes that apply 

to related spending programs. As our report stated, OMB began presenting 

tax expenditure sums alongside outlays and credit activity for each budget 

function in the federal budget from fiscal year 1998 through fiscal year 

2002, but has discontinued the practice. 

Finally, OMB commented that it would be unwise to follow our 

recommendations for the conceptual and methodological reasons 

mentioned above, as well as for other practical reasons. We address OMB’s 

comments on our recommendation to resume including tax expenditures in 

the budget together with related outlay programs in the paragraph above. 

• Regarding our recommendation to develop a framework for conducting 

performance reviews of tax expenditures, OMB stated that it has some 

potential promise but it is clearly a job for Treasury because no other 

agency has access to the data that would be needed to conduct such an 

analysis. However, we are not recommending that OMB be responsible 

for conducting the actual reviews, just for developing and overseeing 

the implementation of a framework for conducting the performance 

reviews. OMB would not need to have access to taxpayer data to 

manage the process. In addition, we recognize the challenges in using 

taxpayer data, which is the reason we recommend that OMB work in 

consultation with Treasury to develop and implement the framework. 

Also, our report recognizes the scarcity of evaluation resources, and we 

suggest factors that would be useful in taking a strategic approach to 

selecting and prioritizing tax expenditure evaluations. To make this 

point more apparent in our report, we added a fourth requirement to our 

recommendation to identify any additional resources that may be 

needed for tax expenditure reviews.

• OMB said that our recommendation to develop clear and consistent 

guidance to Executive Branch agencies on how to incorporate tax 

expenditures in GPRA reports would be counterproductive because 

agencies do not administer the tax code, and they should not be saddled 

with responsibility for something they do not control. OMB misstated 

our recommendation; this report does not recommend that agencies be 

responsible for administering parts of the tax code. As the tax 
Page 77 GAO-05-690 Tax Expenditures

expenditure chapter in OMB’s Analytical Perspectives volume of the 

fiscal year 2006 budget states, tax expenditures may also contribute to 

achieving goals identified in Federal agencies annual and strategic plans 

for their programs and activities. The aim of our recommendation was 

to provide a more cohesive perspective of the government’s programs 

and strategies—including tax expenditures—to address common 

federal goals. As our report states, in passing the Government 

Performance and Results Act, the Senate Governmental Affairs 

Committee called for inclusion of tax expenditures in the GPRA process 

so that more and better information would be available on the 

performance of tax expenditures themselves and the effects of tax 

expenditures would be considered in achieving federal performance 

goals. Our recommendation is consistent with this intent. 

• Regarding our recommendation to require tax expenditures to be 

included in the PART process and any future such budget and 

performance review processes, OMB stated that it has no current plans 

to implement any of the recommendations in this report, but stated that 

other tax expenditures may be evaluated with the PART in the future. 

OMB also stated that the Department of the Treasury manages the tax 

code, so any new PARTs for tax expenditures would generally mean 

more PARTs for Treasury. Within the Executive Branch, major 

responsibility for management of the tax code was given to the 

Department of the Treasury. Given that the Administration is aiming to 

assess nearly 100 percent of federal outlay programs under PART, 

Treasury would be facing less scrutiny than other agencies to the extent 

that tax expenditures are not similarly evaluated under PART. Our 

recommendation merely calls for bringing tax expenditures in line with 

the performance management attention PART gives to outlay programs. 

Further, if our second recommendation to develop an evaluation 

framework for tax expenditures is implemented, OMB would be better 

positioned to target crosscutting reviews of related clusters of programs 

and activities.

We are sending copies of this report to the relevant congressional 

committees and other interested parties. Copies of this report will also be 

made available to others upon request. In addition, the report will also be 

available at no charge on GAO’s Web site at http://www.gao.gov.
Page 78 GAO-05-690 Tax Expenditures

If you or your staff have any questions about this report, please contact 

Mike Brostek at (202) 512-9110 or brostekm@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix VI. 

David M. Walker

Comptroller General 

of the United States
Page 79 GAO-05-690 Tax Expenditures

Appendix I

Scope and Methodology ApApenednxidexiIs

A decade ago, we examined the growth in tax expenditures and examined 

opportunities to focus policymakers’ attention on tax expenditures.1

 To 

assist the Congress in reexamining the base of federal programs and 

policies critical to achieving fiscal discipline in the budget as a whole, this 

report updates our 1994 work. Specifically, this report describes (1) how 

tax expenditures have changed over the past three decades in reported 

number and aggregate size and in comparison to federal spending, revenue, 

and the economy; and (2) the progress that has been made since 1994 in 

how the Executive Branch scrutinizes tax expenditures. To meet each of 

our objectives, we relied on past GAO work, agency and congressional 

reports, and relevant tax expenditure literature. In addition, we 

interviewed agency officials from the Department of the Treasury’s Office 

of Tax Analysis; the Internal Revenue Service’s Office of Research, 

Analysis, and Statistics; the Office of Management and Budget (OMB); 

congressional staff from the Joint Committee on Taxation (JCT); and 

experts on tax policy to obtain a greater understanding of information 

gained through our literature review and to corroborate findings.

To identify how tax expenditures have changed over the past three decades 

in number and size in terms of aggregate revenue loss and outlayequivalents, we analyzed tax expenditure estimates developed by Treasury 

and reported by OMB in the Federal Budget’s Special Analyses, 

Appendixes, and Analytical Perspectives for fiscal years 1974 to 2004. Tax 

expenditure estimates are reported for individual and corporate taxpayer 

groups and categorized by budget function. We chose the tax expenditure 

estimates reported in the budget for our analysis because Treasury 

develops (1) revised estimates based on changes in tax policy and 

economic activity for the year prior to the reported fiscal budget year (i.e., 

retrospective estimates), and (2) outlay-equivalent estimates that facilitate 

comparison to federal spending. Even though Treasury’s estimates are 

retrospective, the final reported numbers are still estimates and may not 

reflect additional policy changes. Although the tax expenditure concept 

can also be applied to other kinds of taxes, such as excise taxes, this report 

only covers tax expenditures for the federal income tax system.

We determined the number of tax expenditures for each fiscal year by 

adding the number of items in the list of tax expenditures reported by 

Treasury for each fiscal year. In certain fiscal years, Treasury reported 

1

GAO, Tax Policy: Tax Expenditures Deserve More Scrutiny, GAO/GGD/AIMD-94-122

(Washington, D.C.: June 3, 1994). 
Appendix I

Scope and Methodology

Page 80 GAO-05-690 Tax Expenditures

estimates for select tax expenditures as two line items on their list, such as 

the expensing of exploration and development costs, which was split out as 

two tax expenditures, one pertaining to oil and gas and one for other fuels 

between fiscal years 1980 and 1995. To be consistent with Treasury’s 

reporting of these tax expenditures in years when they were listed as only 

one item, we summed the revenue loss estimates in the years they were 

listed as two tax expenditures and counted them as one. To determine the 

number of distinct tax expenditures across fiscal years, we reviewed the 

names and descriptions for each tax expenditure reported by OMB in the 

Budget’s Special Analyses, Appendixes, and Analytical Perspectives for 

fiscal years 1974 to 2004. We conducted two independent reviews to verify 

that our list contained only distinct tax expenditures across fiscal years. To 

assist in our review, we also relied on the descriptions reported in the 

Congressional Research Service’s compendiums on tax expenditures and 

legislative histories of certain tax expenditures, as needed. App. IV 

contains our compilation of all tax expenditures reported by Treasury 

between 1974 and 2004.

We aggregated tax expenditure revenue loss estimates to measure growth 

over time. We also summed the revenue loss estimates by their reported 

corporate and individual basis to see how the amounts differed between 

the two taxpayer groups. We converted all sums for each fiscal year into 

constant dollars to adjust for inflation using the chain price indexes 

reported in the fiscal year 2006 federal budget. While summing tax 

expenditure estimates provides a useful perspective, aggregate numbers 

should be interpreted carefully due to interactive effects between tax 

expenditures and potential behavioral changes.

To identify how tax expenditures have changed over the past three decades 

in comparison to federal spending, revenue, and the economy, we summed 

the outlay-equivalent estimates for each fiscal year and compared them to 

the federal budget position in aggregate. We used historical data on 

spending drawn from OMB historical tables and compared them to the 

sums for tax expenditure outlay-equivalent estimates in dollar value and as 

a percentage of GDP. We also used outlay-equivalent estimates to compare 

tax expenditure trends over time by budget function. Finally, we used 

historical data on spending by budget function from OMB historical tables 

and compared them to the sum of tax expenditures by budget functions for 

fiscal year 2004. We worked with Treasury officials to verify any 

discrepancies we found in using the tax expenditure estimates and 

modified our data accordingly.
Appendix I

Scope and Methodology

Page 81 GAO-05-690 Tax Expenditures

To determine the amount of progress since 1994 in how the federal 

government scrutinizes tax expenditures, we examined actions taken to 

implement our earlier recommendations to OMB intended to encourage 

more informed policy debate about tax expenditures and to stimulate joint 

review of related tax and spending programs. We recommended 

(1) developing a structure for conducting reviews of tax expenditures’ 

performance (2) conducting case studies to assess performance review 

structure (3) presenting tax expenditures in the annual budget, and 

(4) incorporating tax expenditures into the annual budgetary review 

process. We reviewed relevant literature, interviewed relevant agency 

officials and tax policy experts, and relied on previous GAO work to 

determine the progress that has been made in implementing our 

recommendations. We reviewed efforts to include tax expenditures under 

the Government Performance and Results Act’s statutory framework for 

strategic planning, performance measurement, and program evaluation.2

 

We also considered activities to include tax expenditures under OMB’s 

Program Assessment Rating Tool process.

To describe how tax expenditures are measured and reported, we 

reviewed, but did not verify, the procedures used by the Joint Committee 

on Taxation and Treasury to estimate the magnitude of revenues forgone 

through tax expenditures or, in Treasury’s case, their outlay-equivalent 

values as well. As described in app. III, JCT and Treasury use different 

conceptual approaches to identify the provisions of the tax code they label 

as tax expenditures. In addition, their estimating models, macroeconomic 

assumptions, and choice of data cause their revenue loss estimates to differ 

somewhat.

We conducted our work between August 2003 and July 2005 in accordance 

with generally accepted government auditing standards.

2

 Pub. L. No. 103-62.
Page 82 GAO-05-690 Tax Expenditures

Appendix II

Comments from the Office of Management 

and Budget ApendxiI

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.

See comment 1.

See comment 2.

See comment 3.

See comment 1.
Appendix II

Comments from the Office of Management 

and Budget

Page 83 GAO-05-690 Tax Expenditures

See comment 1.

See comment 4.
Appendix II

Comments from the Office of Management 

and Budget

Page 84 GAO-05-690 Tax Expenditures

See comment 5.

See comments 1 and 6.
Appendix II

Comments from the Office of Management 

and Budget

Page 85 GAO-05-690 Tax Expenditures

See comment 1.

See comment 7.
Appendix II

Comments from the Office of Management 

and Budget

Page 86 GAO-05-690 Tax Expenditures

See comment 8.

See comment 9.
Appendix II

Comments from the Office of Management 

and Budget

Page 87 GAO-05-690 Tax Expenditures

See comment 10.

See comment 11.
Appendix II

Comments from the Office of Management 

and Budget

Page 88 GAO-05-690 Tax Expenditures

The agency comments and evaluation section of this report discusses our 

overall comments on the Office of Management and Budget’s letter dated 

September 2, 2005. The following are our additional comments on issues 

raised by OMB.

GAO Comments 1. See the agency comments and evaluation section of this report.

2. While we believe that the nation’s current and projected fiscal 

imbalance provides an additional impetus for engaging in such a review 

and reassessment, we believe tax expenditures should be reviewed and 

evaluated for efficiency and effectiveness even if there were no fiscal 

imbalance. We did not suggest that extra attention to tax expenditures 

would eliminate the long-term fiscal imbalance. As our report stated, 

substantive reform of Social Security and the major health programs 

remains critical to recapturing our fiscal flexibility.

3. Our report cites several examples of changes in the presentation of tax 

expenditures over time. For example, starting with the fiscal year 1999 

budget, OMB began including a section outlining possible performance 

measures and issues in evaluating tax expenditures. This section was a 

first step in responding to congressional expectations for the Executive 

Branch to provide information about how tax expenditures meet their 

objectives and affect the performance of other federal programs.

4. We do not take for granted that tax expenditures are similar to 

spending programs. We devote a section of our background to 

describing how tax expenditures differ from, may substitute for, and 

work in conjunction with other spending programs to achieve policy 

objectives. Also, see the agency comments and evaluation section of 

this report.

5. In our report, we recommend adding useful comparisons to spending 

programs to the budget document, while not detracting from or 

changing in any way how the tax expenditure lists can be used to think 

about tax policies.

6. To the contrary, throughout our draft report we note and even 

emphasize the limitations in the methodology of summing the 

individual tax expenditures. In fact, to ensure that summing limitations 

of tax expenditures were clearly acknowledged, we discussed the 

limitations in (1) the introduction of our methodology, (2) a footnote in 
Appendix II

Comments from the Office of Management 

and Budget

Page 89 GAO-05-690 Tax Expenditures

the Results In Brief section, (3) the section devoted to explaining the 

limitations which precedes our presentation of the trends in tax 

expenditures over time, and (4) a footnote for all 10 figures where we 

summed the tax expenditure estimates. In addition, we report a 

quantitatively significant example of interaction effects of tax 

expenditure estimates, which was developed by Treasury at our 

request. The example shows that the revenue loss calculation 

assuming the simultaneous elimination of several itemized deductions 

would be less than the sum of the revenue loss estimates for each 

itemized deduction, each calculated assuming the rest of the tax code 

was unchanged. As our report stated, tax expenditure estimates 

produced by Treasury and JCT are the best and only available data to 

measure the value of tax expenditures and make comparisons to other 

spending programs. In our view, summing the estimates provides 

perspective on the use of tax expenditures as a policy tool and 

represents a useful gauge of the general magnitude of government 

subsidies carried out through the tax code. Our report also cites 

several other researchers who have summed tax expenditure estimates 

to help gain perspective on the use of this policy tool and examine 

trends in the aggregate growth of tax expenditure estimates over time.

7. In this report, we provide a number of examples of studies we and 

others have done of tax expenditures; our reviews often are at the 

request of Congress, and OMB examined two tax expenditures under 

the Administration’s PART initiative. We also provide illustrations of 

the major legislation that has affected tax expenditures since the late 

1970s. However, we stand by our statement that tax expenditures are 

not subject, or effectively subject, to several major processes that apply 

to outlay programs that increase the likelihood of reviews and, perhaps 

more importantly, increase the quantity and quality of information 

available to policymakers in determining whether and how to modify 

tax expenditures. Developing such enhanced information for 

policymakers and displaying it in a manner that facilitates their 

understanding of the total federal effort to address functionally related 

issues, e.g., ensuring adequate housing or stimulating economic 

development, is the thrust and intent of our report and 

recommendations.

8. We disagree with OMB’s characterization that the current tax 

expenditure presentation is “more than adequate” for the public and 

policymakers. We realize that the current budget volume is not 

organized by separate budget functions; however, OMB had previously 
Appendix II

Comments from the Office of Management 

and Budget

Page 90 GAO-05-690 Tax Expenditures

presented revenue loss sums for tax expenditures alongside outlays 

and credit activity for each budget function in the federal budget from 

fiscal year 1998 through fiscal year 2002. As we state in our report, 

these summary tables were a useful starting point in highlighting the 

relative magnitude of tax expenditures and related outlay programs 

across mission areas. In addition, our current recommendation gives 

OMB latitude on how to present them with other outlay programs with 

similar purposes. Further, Congress has shown significant interest in 

reviewing all tools within a mission area. For example, recent 

congressionally-requested studies we conducted have reviewed all 

tools—including tax expenditures—used in the post-secondary 

education and energy areas.1

 Also, see comment 2 as well as the agency 

comments and evaluation section of this report.

9. We disagree with the opinion that OMB has implicitly expressed that it 

would not have a leadership role regarding our second 

recommendation. First, we are not recommending that OMB be 

responsible for conducting the actual reviews, just to develop and 

oversee the implementation of a framework for conducting the 

performance reviews. OMB would not need to have access to taxpayer 

data to manage the process. Secondly, we recognize the challenges in 

using taxpayer data, which is the reason we recommend that OMB 

work in consultation with Treasury to develop and implement the 

framework. Third, taxpayer data may not be the only source of 

performance information on tax expenditures, which is why we 

recommend that the framework address the lack of credible 

performance information on tax expenditures. Finally, our report 

recognizes the scarcity of evaluation resources and we suggest taking a 

strategic approach to select and prioritize tax expenditure evaluations 

based on such factors as the relative priorities, costs, and risks 

associated with related clusters of programs and activities and that 

OMB select similar programs for review in the same year to facilitate 

comparisons and tradeoffs. To make this point more apparent in our 

report, we added a fourth element to our recommendation that OMB 

and Treasury in developing a framework for evaluating tax 

1

GAO, 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.: Jul. 29, 2005), and National Energy 

Policy: Inventory of Major Federal Energy Programs and Status of Policy 

Recommendations, GAO-05-379 (Washington, D.C.: Jun. 10, 2005).
Appendix II

Comments from the Office of Management 

and Budget

Page 91 GAO-05-690 Tax Expenditures

expenditures are to identify any additional resources that may be 

needed for tax expenditure reviews.

10. OMB misstated our recommendation. This report does not recommend 

that agencies be responsible for administering parts of the tax code. As 

we state in our report, in passing the Government Performance and 

Results Act, the Senate Governmental Affairs Committee called for 

inclusion of tax expenditures in the GPRA process so that more and 

better information would be available on the performance of tax 

expenditures themselves and the effects of tax expenditures would be 

considered in achieving federal performance goals. Our 

recommendation is consistent with this intent. Also, see the agency 

comments and evaluation section of this report.

11. Our recommendation aims to bring tax expenditures in line with the 

performance management attention PART gives to outlay programs. 

Our report discussed the two cases where OMB has applied PART to 

tax expenditures—the EITC compliance initiative and the New Markets 

Tax Credit. Within the executive branch, the Department of the 

Treasury has major responsibility for managing programs implemented 

through the tax system. Given that over the next 2 years the 

Administration plans to assess nearly all remaining executive branch 

outlay programs, Treasury would be facing relative less scrutiny than 

other agencies to the extent that the tax expenditure tool is not 

similarly evaluated under PART. Although OMB disagreed with our 

recommendations as a whole, we are encouraged that OMB is still 

considering how other tax expenditures could be evaluated with PART 

in the future. In moving forward, PART reviews of tax expenditures in 

isolation might be revealing, but we would urge a more comprehensive 

and crosscutting approach to assessing all tools—including tax 

expenditures—related to common goals.
Page 92 GAO-05-690 Tax Expenditures

Appendix III

How Tax Expenditures Are Measured and 

Reported ApendxiI

To understand the trends in the size of tax expenditures, it is helpful to 

understand how tax expenditures are measured and reported annually. 

This appendix explains the baselines used to distinguish tax expenditures 

from other provisions in the tax code and provides an explanation of the 

different methods that are used to measure tax expenditures.

Tax Expenditures Are 

Reported Annually by Law 

and Measurements Depend 

on Baselines Used

The Congressional Budget Act of 1974 defines tax expenditures as “those 

revenue losses attributable to provisions of the federal tax laws which 

allow a special exclusion, exemption, or deduction from gross income or 

which provide a special credit, a preferential rate of tax, or a deferral of tax 

liability. Both the congressional Joint Committee on Taxation (JCT) and 

the Department of the Treasury’s Office of Tax Analysis annually compile a 

list of tax expenditures and estimates of their cost each year. The 

Department of the Treasury’s (Treasury) tax expenditure estimates are 

included in the annual federal budget by the Office of Management and 

Budget (OMB).

While, in general, the tax expenditure lists published annually by JCT and 

Treasury are similar, they differ somewhat in the number of tax 

expenditures reported and the estimated revenue loss for particular 

expenditures. Part of this difference arises because the organizations use 

different income tax baselines to determine tax expenditures. To 

determine the tax code provisions that satisfy the definition of a tax 

expenditure, the existing tax law must be compared or measured against 

an alternative set of tax rules that represent a baseline. The Congressional 

Budget Act did not define a specific baseline tax structure. As a result, the 

Treasury and the staff of the JCT have used judgment to define the different 

baselines that they use to develop lists of tax expenditures. Before the 

fiscal year 1983 budget, there were few differences between the Treasury 

and JCT tax expenditure lists because both organizations used a baseline 

patterned on a comprehensive income tax, which was deemed the “normal” 

baseline. JCT has used this baseline consistently over time in producing its 

tax expenditure list, while Treasury has modified its normal baseline over 

time and provided alternative baselines. In general, the normal income tax 

law baseline developed by both Treasury and JCT represents a broad-based 

income tax on individuals and a separate income tax on corporations. The 

normal baseline includes income from all sources, including wages and 

salaries, fringe benefits and other forms of employee compensation, 

interest income, dividends, realized capital gains, and net income from noncorporate businesses such as sole proprietorships and partnerships. The 
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 93 GAO-05-690 Tax Expenditures

normal baseline generally allows for personal exemptions, deductions for 

costs incurred to earn income, and a standard deduction.

Currently, the normal baselines used by both Treasury and JCT differ 

somewhat. Treasury’s normal baseline excludes several tax expenditures 

that are included in the normal baseline used by JCT and leads to several 

tax expenditures being reported by JCT only. For instance, the exclusion 

of Medicare hospital insurance benefits is included in the JCT list but this 

provision is not included in the federal budget tax expenditure list because 

Treasury views the exclusion of government benefits received in kind as 

part of its normal baseline. Additional examples of specific tax 

expenditures reported by only JCT or Treasury can be found at the end of 

this appendix in table 2.

In the fiscal year 1983 budget, Treasury introduced the concept of a 

reference baseline. The reference baseline used by Treasury is also 

patterned on a broad-based income tax, but it is closer to existing law 

because tax expenditures by definition are limited to special exceptions 

that serve programmatic functions, such as national defense, income 

security, and education. Under Treasury’s reference baseline, two 

conditions are necessary for a provision to qualify as a tax expenditure: 

(1) The provision must be “special” in that it applies to a narrow class of 

transactions or taxpayers and (2) There must be a general provision to 

which the special provision is a clear exception. The set of general tax 

rules in the existing tax code is used as the standard by which various 

provisions are determined to be special. Whereas accelerated depreciation 

was considered a special rule exception under the normal baseline, these 

provisions were not considered tax expenditures under the reference 

baseline, because accelerated depreciation was considered to be the 

general treatment for the depreciation of business assets. The preferential 

tax rate for capital gains was included in Treasury’s tax expenditure list 

based on the general tax code rule that income from any source is 

considered taxable. For fiscal year 1983, Treasury began to report 

estimates using the reference baseline for some tax expenditures and then 

reinstituted reporting estimates for the normal baseline in fiscal year 1985. 

This reporting practice has continued to the present.

In recent years, Treasury modified treatment of certain provisions under its 

normal and reference baselines and introduced two supplemental 

baselines. In the 2005 and 2006 budgets, Treasury excluded the reduced tax 

rate on dividends and capital gains that have already been taxed under the 

corporate income tax from the reference law baseline because it believes 
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 94 GAO-05-690 Tax Expenditures

that since current law taxes these forms of corporate income twice, it is an 

inappropriate baseline to use. Also, in the 2004, 2005, and 2006 budgets, 

Treasury changed how it computed the accelerated depreciation tax 

expenditure under the normal baseline by using a measure of economic 

depreciation rather than straight-line depreciation as the baseline 

depreciation method, which was used in prior years. The measure of 

economic depreciation is generally faster than the straight-line method, so 

the tax expenditure estimates for accelerated depreciation for fiscal years 

2002, 2003, and 2004 (from the 2004, 2005, and 2006 budgets) are smaller 

than what they would have been if the straight-line depreciation method 

were used. In addition, in the 2004 budget, Treasury began reporting two 

supplemental baselines, as discussed in figure 14.

Figure 14: Treasury’s Supplemental Reporting for Comprehensive Income and 

Consumption Tax Baselines

Source: Office of Management and Budget. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006, 

(Washington, D.C.: 2005). 

In the 2004 budget, Treasury began reporting estimates for the 30 largest tax 

expenditures using comprehensive income and consumption tax baselines.

• Treasury defines its comprehensive income baseline as the real—inflation adjusted—

accrual of wealth arising between the beginning and end of the year. The 

comprehensive income baseline includes all accrual of wealth, whether or not realized, 

whether or not related to a market transaction, and whether it is a return to capital or 

labor. Inflation adjusted capital gains would be included in comprehensive income as 

they accrue. According to Treasury’s reporting, 13 large tax expenditures under its 

normal and reference baselines, such as capital gains on home sales, would continue 

to be considered tax expenditures under a comprehensive baseline. Treasury was 

uncertain about whether 6 would still be considered tax expenditures and concluded 4 

would probably not be tax expenditures under the comprehensive income tax baseline. 

The tax exemption of in-kind benefits from government programs such as food stamps, 

public housing, and Medicaid would be added to Treasury’s tax expenditure list under 

the comprehensive income tax baseline.

• Treasury defines its consumption baseline as a combination of an income tax plus a 

deduction for net saving. The major difference between Treasury’s comprehensive 

income and consumption baselines is the treatment of tax expenditures related to 

saving. According to Treasury, 4 tax expenditures under its normal or reference 

baseline would still be considered tax expenditures under its consumption baseline, 

and another 12 would probably still be considered tax expenditures as well, such as 

the child tax credit. The capital gains exclusion on home sales would not be 

considered a tax expenditure under the consumption tax baseline. However, tax 

expenditures unrelated to broad based saving incentives would remain tax 

expenditures under a consumption baseline.
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 95 GAO-05-690 Tax Expenditures

Both Treasury and JCT provide estimates of revenue loss, which is the 

amount of revenue that the government forgoes as the result of each 

special provision in the tax code. Revenue loss is estimated for each tax 

expenditure separately by comparing the revenue raised under current law 

with the revenue that would have been raised if the single provision did not 

exist, assuming that taxpayer behavior and all other tax and spending 

provisions remain constant. A revenue loss estimate does not represent 

the amount of revenue that would be gained if a particular tax expenditure 

were repealed, since repeal of the expenditure would probably change 

taxpayer behavior in some way that would affect revenue.

Treasury and JCT tax expenditure lists will also differ because each 

organization uses a different de minimis amount, which is the minimum 

amount of revenue loss threshold for Treasury and JCT to report a tax 

expenditure. JCT excludes tax expenditure estimates that result in 

revenue losses that are less than $50 million over its 5-year projected 

period. For instance, the tax exemption for certain small insurance 

companies was not included in JCT’s January 2005 list of tax expenditures 

because the estimated revenue loss was below its de minimis amount. 

Treasury rounds all yearly estimates to the nearest $10 million and 

excludes tax expenditures with estimates that round to zero in each of the 

7 years that it reports tax expenditure estimates.

JCT and Treasury estimates of revenue loss also differ somewhat due to 

different economic and technical assumptions. For instance, JCT and 

Treasury use different sources for macroeconomic assumptions 

incorporated in their revenue loss estimates. JCT uses CBO 

macroeconomic assumptions in its tax expenditure projections and 

Treasury uses assumptions based on consultations with OMB, and the 

Council of Economic Advisers,1

 the same assumptions used for the 

President’s budget. In addition to projecting future revenue losses, 

Treasury also reports re-estimates for the past fiscal year, which 

incorporate changes in tax policy and reflect more up-to-date economic 

and taxpayer data. Table 3 compares tax expenditure reporting by JCT and 

Treasury.

1

 At OMB, the economic forecast is produced by the Troika: economists drawn from the 

Council of Economic Advisers, the Department of the Treasury, and OMB.
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 96 GAO-05-690 Tax Expenditures

Table 3: Comparison of Tax Expenditure Reporting by JCT and Treasury 

Sources: Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006 

(Washington, D.C.: 2005); Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2005-2009, JCS-1-05 

(Washington, D.C.: Jan. 12, 2005); and Polackova Brixi, Hana, and Christian M.A. Valenduc, and Zhicheng Li Swift, Tax Expenditures—

Shedding Light on Government Spending through the Tax System: Lessons from Developed and Transition Economies (Washington, 

D.C.: The World Bank, 2004).

a Estimates are based on mid-session economic assumptions; exceptions are the earned income tax 

credit and the child tax credit, which involve outlay components and hence are updated to reflect the 

economic assumptions used elsewhere in the budget. At OMB, the economic forecast is produced by 

the Troika: economists drawn from the Council of Economic Advisers, the Department of the Treasury, 

and OMB. See Analytical Perspectives, “Economic Assumptions and Analyses” for a discussion of the 

Troika assumptions.

Outlay-Equivalent Estimates 

Facilitate Comparison to 

Direct Spending Programs 

In addition to revenue loss estimates, Treasury also measures tax 

expenditures in terms of their outlay-equivalent value, which allows the 

cost of a tax expenditure to be compared with a direct federal outlay, were 

each to provide the same benefit to the taxpayer. JCT does not produce 

outlay-equivalent estimates. The underlying economic assumptions used 

Report Elements

Joint Committee on 

Taxation (JCT)

U.S. Department of the 

Treasury 

Period covered Current fiscal year and 4 

future fiscal years

Last fiscal year, current fiscal 

year, and 5 future fiscal years

Baseline used Normal Reference (since 1983), 

normal

Measurement estimates 

produced

Revenue loss Revenue loss, outlayequivalent

Macroeconomic 

assumptions 

Congressional Budget Office 

(CBO) (mid-year update)

OMB, Treasury, and Council 

of Economic Advisersa

De minimis rule Excludes provisions with 

estimates of less than $50 

million over the 5-year period

Rounds all yearly estimates to 

the nearest $10 million and 

excludes provisions with 

estimates that round to zero 

in each of the 7 years

Categorized by Budget function, taxpayer 

group (i.e., individual or 

corporate)

Budget function, taxpayer 

group (i.e., individual or 

corporate)

Supplemental information Distributional estimates by 

income class (for 9 

expenditures); summary of 

recent legislation regarding 

tax expenditures; list of 

expiring tax expenditure 

provisions; and summary of 

differences between Treasury 

and JCT lists of tax 

expenditures 

Present value estimates (for 

deferral expenditures); 

comprehensive and 

consumption baselines used 

(for select expenditures)
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 97 GAO-05-690 Tax Expenditures

for the outlay-equivalent and revenue loss estimates are the same. 

However, to estimate outlay-equivalents, Treasury will increase—“gross 

up”—the revenue loss estimate by the average marginal tax rate that 

applies to the relevant taxpayers (the taxpayers that take the particular 

credit or deduction or earn the income that is excluded from tax).2

 The 

result is an estimate of the amount of direct spending that would be needed 

to leave the relevant taxpayer with the same amount of benefit, after he or 

she paid tax on the amount received through the spending, as the taxpayer 

would get from the tax provision itself. For example, the outlay-equivalent 

estimate for the housing and meal allowances for military personnel tax 

expenditure reflects the additional pre-tax income that military personnel 

would have to be paid to raise their income after federal taxes by the 

amount of the benefits, so that it can be compared with other defense 

outlays on a consistent basis. An exception to this general rule of 

increasing the revenue loss estimate is made for tax expenditures that are 

believed to reduce the price of particular goods and services. In this case 

no gross up is made because a spending program that led to the same price 

reduction would not increase the tax liability of the taxpayer. For instance, 

revenue loss estimates for accelerated depreciation on rental housing and 

state prepaid tuition do not differ from the outlay-equivalent estimates for 

these tax expenditures.

Outlay-equivalents can also differ from revenue loss estimates because 

they are calculated based on an even flow of virtual payments over the year 

to make the estimates comparable to actual outlay programs. Even for 

those tax expenditures that do not require a calculated adjustment, 

differences between the revenue losses and outlay-equivalents can occur 

solely because of differences in timing factors. Although revenue loss 

estimates can be affected by the collection patterns of the corporate and 

personal income taxes, the cash flow of direct spending programs can 

differ widely from the annual tax collection cycle. Of the 146 tax 

expenditures reported in the fiscal year 2006 budget, 91 were “grossed up” 

for the outlay-equivalent estimate with the implied rate varying across 

different provisions. Just as there is debate over which tax provisions 

should be listed as tax expenditures, tax experts do not always agree on 

whether specific tax expenditures should be grossed up or not. It may not 

2

The net revenue loss for the federal government would be unchanged. Assuming the 

comparable outlay program would be taxable, the recipients would pay taxes on the higher 

outlay amount, and federal revenue also would be higher—resulting in no net change in the 

federal budget position.
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 98 GAO-05-690 Tax Expenditures

be apparent to observers why the outlay-equivalent and revenue loss 

estimates are the same for some tax expenditures and why they differ for 

other tax expenditures. 3

Other estimates of tax expenditures produced by JCT and Treasury also 

may differ from revenue loss estimates. These supplemental estimates are 

discussed in figure 15.

Figure 15: Supplemental Estimates Developed by Treasury and JCT

Sources: Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006 

(Washington, D.C.: 2005); and Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2004-2008, JCS-8-

03 (Washington, D.C.: Dec. 22, 2003).

Comparison of JCT With 

Treasury Tax Expenditure 

Lists

Although there are differences between how Treasury and JCT develop and 

measure tax expenditures, the sum of revenue loss estimates from each list 

has followed relatively the same trend in the past. Figure 16 compares the 

sum of revenue loss estimates for JCT and Treasury since the last 

comprehensive tax reform, when the Tax Reform Act of 1986 was adopted. 

Since fiscal year 2002, the trends in the sums of the two sets of revenue loss 

estimates have diverged. Since the fiscal year 2004 Budget, Treasury’s 

3

For more information on how outlay-equivalent estimates are measured, see the Office of 

Management and Budget, Special Analysis G—Fiscal Year 1983 (Washington, D.C.: 1982); 

and the U.S. Congressional Budget Office, Tax Expenditures: Current Issues and 5-Year 

Budget Projections for Fiscal Years 1984-1988 (Washington, D.C.: October 1983).

• Since the 1995 fiscal year budget, Treasury has produced present value estimates for 

the approximately 20 tax expenditures that involve tax deferrals or other long-term 

revenue effects. Revenue loss estimates, which are cash based, can overstate the 

real effect on receipts to the government for tax deferrals because deferred taxes will 

ultimately be paid. To produce present value estimates Treasury must make certain 

assumptions. Assumptions also may be specific to individual tax expenditures, such 

as the time frame when people will retire and begin to collect funds from retirement 

accounts (and pay income taxes on them). Treasury uses the simplifying assumption 

that interest rates and tax rates remain constant over time.

• JCT also presents a distributional analysis of several tax expenditures. This analysis 

estimates the amount of benefits by income class for the deductions for medical 

expenses, real estate taxes, charitable contributions, and the child care and earned 

income credits. JCT does not report all individual tax expenditures because of the 

difficulty in making reliable estimates of the income distribution of items that do not 

appear on tax returns under present law.
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 99 GAO-05-690 Tax Expenditures

estimates of dividends and capital gains tax expenditures are lower than 

JCT’s, at least in part, because Treasury changed its definition of the tax 

expenditures to reflect the reduced tax rates only on dividends and capital 

gains from sources other than corporate equity. Treasury also redefined 

the accelerated depreciation tax expenditures under the normal baseline to 

reflect depreciation relative to a replacement cost basis, rather than the 

historic cost basis previously used.

Figure 16: Sum of Revenue Loss Estimates Reported by the Joint Committee on Taxation and the U.S. Department of the 

Treasury (1987-2004)

Notes: Summing the revenue loss estimates does not take into account possible interaction effects 

among the tax expenditures. Changes in economic conditions and estimation techniques, can affect 

revenue loss estimates for tax expenditures, making them differ from year to year. Changes to the 

number of tax expenditures reported by Treasury would also affect the amount of revenue loss 

reported if some tax expenditures were eliminated or added. Finally, revenue loss estimates include 

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

Table 4 lists the tax expenditures and their associated revenue loss 

estimates that were reported by both Treasury and JCT for fiscal year 2004. 

The table details the number and size of tax expenditure estimates between 

the two lists. For example, in the National Defense budget function, the 

revenue loss estimate for the exclusion of benefits and allowances to 

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

850

900

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal year

Dollars in billions (in constant 2004 dollars) 

U.S. Department of the Treasury

Joint Committee on Taxation

Source: GAO analysis of OMB Fiscal Year Budget and Joint Committee on Taxation Reports on Tax Expenditures, fiscal years 

1989-2005.
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 100 GAO-05-690 Tax Expenditures

armed forces personnel was estimated at $2.5 billion by Treasury and $2.7 

billion by JCT. In the same function, JCT also reported revenue losses for 

two tax expenditures not listed by Treasury.

Table 4: List of Tax Expenditures Reported by the U.S. Department of the Treasury and the Joint Committee on Taxation for 

Fiscal Year 2004

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual

National Defense Exclusion of benefits and allowances to Armed 

Forces personnel

2,460 2,700

Exclusion of military disability benefitsb 100

Deduction for overnight-travel expenses of National 

Guard and Reserve Membersb

100

International Affairs Exclusion of income earned abroad by U.S. citizens 2,680 3,400

Exclusion of certain allowances for federal employees 

abroad 

850 400

Extraterritorial income exclusion 5,500 5,200

Inventory property sales source rule exception 1,500 5,400

Deferral of income of controlled foreign corporations 7,240 4,600

Deferred taxes for financial firms on certain income 

earned overseas

2,130 1,900

General Science, 

Space, and 

Technology

Expensing of research and experimental 

expenditures

-2,280 -50 3,500 100

Credit for increasing research activities 4,630 50 3,900 a

Energy Expensing of exploration and development costs d 230 30 500 a

Expensing of exploration and development costs: 

other fuels b

a a

Excess of percentage over cost depletione 1,210 110 400 a

Excess of percentage over cost depletion: other fuels

b

a a

Alternative fuel production credit 1,000 40 500 100

Exception from passive loss limitation for working 

interests in oil and gas properties c

20

Capital gains treatment of royalties on coal c 70

Exclusion of interest on energy facility bonds 20 80 a 100

Enhanced oil recovery credit 300 30 200 100

New technology credit 330 a a
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 101 GAO-05-690 Tax Expenditures

Alcohol fuel credit f 20 10 a

Tax credit and deduction for clean fuel-burning 

vehicles c

20 50

Exclusion from income of conservation subsidies 

provided by public utilities

100 a

Tax credit for electricity production from wind, 

biomass, and poultry waste b

200 a

Natural Resources 

and Environment

Expensing of exploration and development costs, 

nonfuel minerals

210 20 a a

Excess of percentage over cost depletion, nonfuel 

minerals

100 100

Exclusion of interest on bonds for water, sewage, and 

hazardous waste facilities

110 390 200 500

Capital gains treatment of certain timber income c 70

Expensing of multiperiod timber-growing costs 230 110 200 a

Tax incentives for preservation of historic structures 

(under Commerce and housing credit budget function 

for JCT)

230 70 400 100

Special rules for mining reclamation reserves b a a

Special tax rate for nuclear decommissioning reserve 

fund b

300

Exclusion of contributions in aid of construction for 

water and sewer utilities b

a

Expensing of capital costs with respect to complying 

with EPA sulfur regulations b

Exclusion of gain or loss on sale or exchange of 

certain brownfield sites b

Agriculture Expensing of certain capital outlays 20 80 a 300

Expensing of fertilizer and soil conditioner costsb a 100

Expensing of soil and water conservation 

expenditures b

a a

Expensing of certain multiperiod production costs c 10 40

Treatment of loans forgiven for solvent farmers 10 100

Capital gains treatment of certain income c 670

Income averaging for farmers 40 a

Deferral of gain on sales of farm refiners c 10

Bio-Diesel tax credit b

Exclusion of cost-sharing payments b a a

(Continued From Previous Page)

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 102 GAO-05-690 Tax Expenditures

Expensing of the costs of raising dairy and breeding 

cattle b

a 100

Five-year carryback period for net operating losses 

attributable to farming b

a a

Commerce and 

Housing Credit

Exemption of credit union income 1,270 1,200

Excess bad debt reserves of financial institutions c -20

Exclusion of interest on life insurance savings 2,010 18,820 1,400 24,700

Special alternative tax on small property and casualty 

insurance companies c

10

Deduction of unpaid property loss reserves for 

property and casualty insurance companies b

1,500

Tax exemption of certain insurance companies owned 

by tax-exempt organizations c

180

Small life insurance company deduction 80 100

Special treatment of life insurance company 

reservesb

1,700

Exclusion of interest on owner-occupied mortgage 

subsidy bonds

220 800 300 800

Exclusion of interest on rental housing bonds 80 280 100 200

Deductibility of mortgage interest on owner-occupied 

homes

61,450 61,400

Deductibility of state and local property tax on owneroccupied homes19,930 18,700

Capital gains exclusion on home sales 29,730 17,900

Exclusion of net imputed rental income on owneroccupied homes c

24,590

Exception from passive loss rules for $25,000 of 

rental loss c

5,030

Credit for low-income housing investments 2,930 730 3,000 1,300

Accelerated depreciation on rental housing -10 760 300 3,000

Deferral of income from post-1987 installment sales 290 810 600 400

Cancellation of indebtedness c 30

Exceptions from imputed interest rules 50 a 300

Capital gains (except agriculture, timber, iron ore, and 

coal)

25,150 66,100

Capital gains exclusion of small corporation stock c 160

Step-up basis of capital gains at death 24,200 35,900

(Continued From Previous Page)

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 103 GAO-05-690 Tax Expenditures

Carryover basis of capital gains on gifts 210 4,300

Ordinary income treatment of loss from small 

business corporation stock sale c

50

Accelerated depreciation of buildings other than 

rental housing

-2,980 -280 1,800 1,900

Accelerated depreciation of machinery and 

equipment 

37,080 7,610 52,900 16,100

Expensing of certain small investments 

(JCT did not report a revenue loss estimate)

680 840

Amortization of start-up costs 70 10 a 600

Deduction for U.S. production activities b

Special rules for certain film and TV productionb

Graduated corporation income tax rate 2,450 3,300

Exclusion of interest on small issue bonds 100 350 100 300

Deferral of gain on like-kind exchanges b 1,200 400

Deferral of gain on involuntary conversions resulting 

from Presidentially-declared disastersb

a

Expensing of magazine circulation expenditures b a a

Special rules for magazine, paperback book, and 

record returns b

a a

Completed contract rules b 200 a

Cash accounting, other than agriculture b a 700

Exception from net operating loss limitations for 

corporations in bankruptcy proceedings b

700

Tax credit for employer-paid FICA taxes on tipsb 200 300

Transportation Deferral of tax on shipping companies 20 100

Deduction for clean fuel vehicles and refueling 

property b

a 200

Exclusion of reimbursed employee parking expenses

c

2,470

Exclusion of employer-provided transit passes 410 3,800

Tax credit for certain expenditures for maintaining 

railroad tracks b

Community and 

Regional 

Development

Investment credit for rehabilitation of structures, other 

than historic

20 20 100 a

Exclusion of interest for airport, dock, and similar 

bonds

180 670 200 600

(Continued From Previous Page)

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 104 GAO-05-690 Tax Expenditures

Exemption of certain mutuals and cooperatives 

income c

60

Empowerment zones, enterprise communities, and 

renewal communities c

280 800

Empowerment zone tax incentives b 300 300

Renewal community tax incentives b 100 300

New markets tax credit 70 220 100 200

Expensing of environmental remediation costs 70 10 a a

Deferral of capital gains with respect of dispositions of 

transmission property b

New York City Liberty Zone tax incentives b 100 200

District of Columbia tax incentives b a a

Wage credit for Indian reservation employmentb a a

Accelerated depreciation for Indian reservation 

investments b

100 100

Education, Training, 

Employment, and 

Social Services

Exclusion of scholarship and fellowship income 1,320 1,500

HOPE tax credit 3,320 4,300

Lifetime Learning tax credit c 2,190

Education Individual Retirement Accounts 110 300

Deductibility of student loan interest 760 700

Deduction for higher education expenses 1,280 2,700

State pre-paid tuition plans 210 500

Exclusion of interest on student loan bonds 60 230 100 300

Exclusion of interest on bonds for private nonprofit 

educational facilities

210 760 300 800

Credit for holders of zone academy bonds 90 100

Exclusion of interest on savings bonds redeemed to 

finance educational expenses

10 a

Parental personal exemption for students age 19 or 

over

3,200 1,500

Deductibility for charitable contributions (education) 510 3,180 1,100 5,200

Exclusion of employer-provided education assistance 530 800

Special deduction for teacher expenses 150 100

Work opportunity tax credit 240 40 200 a

(Continued From Previous Page)

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 105 GAO-05-690 Tax Expenditures

Welfare-to-work tax credit 50 10 100 a

Employer-provided child care exclusion g 600 800

Employer-provided child care credit 100 a

Assistance for adopted foster children c 290

Adoption credit and exclusion 450 100

Exclusion of employee meals and lodging (other than 

military) 

810 900

Child credit h 22,400 44,100

Credit for child and dependent care expenses 2,990 3,100

Credit for disabled access expenditures 10 20 a 100

Deductibility for charitable contributions, other than 

education and health

1,170 26,200 1,800 27,900

Exclusion of certain foster care payments 440 600

Exclusion of parsonage allowances 430 400

Exclusion of benefits provided under cafeteria plans b i 16,900

Exclusion of miscellaneous fringe benefits b 5,800

Exclusion of employee awards b 100

Exclusion of income earned by voluntary employees’ 

beneficiary associations b

3,200

Deferral of taxation on spread on acquisition of stock 

under incentive stock option plans and employee 

stock purchase plans b j 

400

Health Exclusion of employer contributions for medial 

insurance premiums and medical carek 

102,250 96,000

Deductibility of self-employed medical insurance 

premiums

3,300 3,300

Medical savings accounts/health savings accounts 620 300

Deductibility of medical expenses 7,380 5,900

Exclusion of interest on hospital construction bonds 400 1,470 500 1,200

Exclusion of workers’ compensation benefits (medical 

benefits)b

3,700

Deductibility of charitable contributions (health) 150 2,940 900 3,500

Tax credit for orphan drug research 180 200

Special Blue Cross/Blue Shield deduction (in 

Commerce and housing credit budget function for 

JCT) 

400 500

(Continued From Previous Page)

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 106 GAO-05-690 Tax Expenditures

Tax credit for health insurance purchased by certain 

displaced and retired individuals l

50 a a

Exclusion of medical care and CHAMPUS/TRICARE 

medical insurance for military dependents, retirees, 

and retiree dependents b

1,700

Medicare Exclusion of untaxed Medicare benefits: hospital 

insurance (Part A)b

16,800

Exclusion of untaxed Medicare benefits: 

supplementary medical insurance (Part B)b

11,000

Exclusion of untaxed Medicare benefits: prescription 

drug insurance (Part D)b

Exclusion of certain subsidies to employers who 

maintain prescription drug plans for Medicare b

Income Security Exclusion of railroad retirement system benefitsc (For 

JCT this is combined with the exclusion of Social 

Security benefits: retired workers) 

400

Exclusion of worker’s compensation benefits 5,490 4,800

Exclusion of public assistance benefits 410 3,200

Exclusion of special benefits for disabled coal miners 60 100

Exclusion of military disability pensions c 100

Exclusion of damages on account of personal 

physical injuries or physical sickness b

1,400

Net exclusion of pension contributions and earnings: 

employer plans

46,970 94,600

Net exclusion of pension contributions and earnings: 

401(k) plans c

47,730

Net exclusion of pension contributions and earnings: 

individual retirement plans

7,450 13,000

Net exclusion of pension contributions and earnings: 

low and moderate income savers credit c

970

Net exclusion of pension contributions and earnings: 

Keogh plans

8,830 6,200

Exclusion of other employee benefits: premiums on 

group term life insurance

2,070 2,400

Exclusion of other employee benefits: premiums on 

accident and disability insurance

260 2,400

Small business retirement plan credit 40 40 a a

Income of trusts to finance supplementary 

unemployment benefits c

20

(Continued From Previous Page)

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 107 GAO-05-690 Tax Expenditures

Source: OMB. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006. (Washington, D.C.: 2005; and JCT, 

Estimates of Federal Tax Expenditures for Fiscal Years 2004-2008, JCS-8-03 (Washington, D.C.: December 22, 2003).

Notes: Treasury estimates were rounded to the nearest $10 million. Provisions with estimates that 

rounded to zero in each year were not reported by Treasury.

a An estimate was not reported by JCT because the positive tax expenditure was less than $50 million.

b

Tax expenditure reported by JCT only. The exclusion of untaxed Medicare benefits: prescription drug 

insurance (Part D) and the exclusion of certain subsidies to employers who maintain prescription drug 

plans for Medcare were listed by JCT as tax expenditures, but revenue loss estimates were reported 

only for future years.

c

Tax expenditure reported by Treasury only. Seven additional tax expenditures were reported on 

Treasury’s list in the fiscal year 2006 budget, but estimates for these tax expenditures were reported 

Special employee stock ownership plans (ESOPs) 

rules (Located under the Education budget function 

for JCT) 

1,600 320 800 300

Additional deduction for the blind c 30

Additional deduction for the elderly c 1,700

Additional standard deduction for the blind and the 

elderly b

2,000

Tax credit for the elderly and disabled 20 a

Deduction of casualty losses 550 200

Earned income tax credit (EITC)m 4,893 34,100

Tax credit for certain individuals for elective deferrals 

and IRA contributions b

2,500

Social Security Exclusion of Social Security benefits: retired workers 

(JCT included railroad retirement benefits)

19,200 20,000

Exclusion of Social Security benefits: disabled c 3,580

Exclusion of Social Security benefits: dependents 

and survivors c

4,140

Veterans’ Benefits 

and Services

Exclusion of veterans death benefits and disability 

compensation

3,300 3,100

Exclusion of veterans’ pensions 110 100

Exclusion of GI bill benefits 130 200

Exclusion of interest on veterans’ housing bonds 10 40 a a

General Purpose 

Fiscal Assistance

Exclusion of interest on public purpose state and 

local bonds 

6,210 19,940 7,100 18,200

Deductibility of nonbusiness state and local taxes 

other than owner-occupied homes 

45,290 44,300

Tax credit for corporations receiving income from 

doing business in U.S. possessions 

1,000 1,400

Interest Deferral of interest on U.S. savings bonds 50 1,700

(Continued From Previous Page)

Dollars in millions

Budget function Tax expenditure name

Treasury estimates JCT estimates

Corporate Individual Corporate Individual
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 108 GAO-05-690 Tax Expenditures

only for future years. The seven tax expenditures are: (1) expensing of capital costs with respect to 

complying with EPA sulfur regulations, (2) exclusion of gain or loss on sale or exchange of certain 

Brownfield sites, (3) Bio-diesel tax credit, (4) deduction for U.S. production activities, (5) special rules 

for certain film and TV production, (6) tax credit for certain expenditures for maintaining railroad tracks, 

and (7) deferral of capital gains with respect of dispositions of transmission property.

d

JCT reported this tax expenditure as “expensing of exploration and development costs, oil and gas.”

e

JCT reported this tax expenditure as “excess of percentage over cost depletion, oil and gas.”

 fFor the Treasury estimates, the partial exemption from the excise tax for alcohol fuels results in a 

reduction in excise tax receipts of $1.4 billion in 2004. For the JCT estimates, the exemption from the 

excise tax for alcohol fuels results in a reduction in excise tax receipts, net of income tax effect, of $1.1 

billion in each of the fiscal years 2004 through 2006, and $1.2 billion per year in fiscal years 2007 and 

2008.

g

The JCT estimate includes employer-provided child care purchased through dependent care flexible 

spending accounts.

h

The Treasury estimate in the table indicates the effect of the child tax credit on receipts. The effect of 

the credit on outlays is $8.9 billion in 2004. The JCT estimate includes refundable amounts, amounts 

used to offset income taxes, and amounts used to offset other taxes. The amount of refundable child 

tax credit and earned income tax credit used to offset taxes other than income tax or paid out as 

refunds is $44.3 billion in 2004.

I

The estimate includes amounts of employer-provided health insurance purchased through cafeteria 

plans and employer-provided child care purchased through dependent care flexible spending 

accounts.

j

The estimate does not include offsetting denial of corporate deduction for qualified stock option 

compensation.

k

The JCT estimate includes employer-provided health insurance purchased through cafeteria plans.

l

In addition to the receipts shown, there are outlays of $70 million in 2004. 

mThe Treasury estimate indicates the effect of the earned income tax credit on receipts. The effect of 

the credit on outlays is $33.1 billion in 2004. The JCT estimate includes refundable amounts, amounts 

used to offset income taxes, and amounts used to offset other taxes. The amount of refundable child 

tax credit and earned income tax credit used to offset taxes other than income tax or paid out as 

refunds is $44.3 billion in 2004.

For fiscal year 2004, table 5 lists the aggregate revenue loss estimates 

reported by both Treasury and JCT for each budget function. The table 

permits a comparison of the number and size of Treasury’s versus JCT’s tax 

expenditure estimates when summed by budget function.
Appendix III

How Tax Expenditures Are Measured and 

Reported

Page 109 GAO-05-690 Tax Expenditures

Table 5: Sum of Revenue Loss Estimates for Tax Expenditures by Budget Function Reported by the U.S. Department of the 

Treasury and Joint Committee on Taxation, Fiscal Year 2004

Source: GAO Analysis.

Note: Summing the revenue loss estimates by budget fuction does not take into account possible 

interaction effects among the tax expenditures.

Dollars in millions

Budget Function

Treasury JCT

Sum of Revenue

Loss Estimates

Number of Tax

Expenditures

Sum of Revenue

Loss Estimates

Number of Tax

Expenditures

National defense $2,460 1 $2,900 3

International affairs 19,900 6 20,900 6

General science, space, and technology 2,350 12 7,500 2

Energy 3,670 11 2,100 11

Natural resources and environment 1,440 5 1,900 8

Agriculture 880 6 600 8

Commerce and housing credit 265,750 29 325,900 33

Transportation 2,900 3 4,100 3

Community and regional development 2,400 6 2,700 10

Education, training, employment, and social services 74,270 27 128,000 32

Health 119,140 9 117,700 11

Medicare N/A N/A 27,800 4

Income security 129,953 20 168,000 16

Social security 26,920 3 20,000 1

Veterans’ benefits and services 3,590 4 3,400 4

General purpose fiscal assistance 72,440 3 71,000 3

Interest 50 1 1,700 1
Page 110 GAO-05-690 Tax Expenditures

Appendix IV

Compilation of Tax Expenditures Reported by 

Treasury (1974 to 2004) ApendxiIV

To identify how tax expenditures have changed over the past three decades 

in number and size, in terms of aggregate revenue loss, we analyzed the list 

of tax expenditures reported by the Department of the Treasury (Treasury) 

in the Budget’s Special Analyses, Appendixes, and Analytical Perspectives 

for fiscal years 1974 to 2004. The tax expenditures reported by Treasury 

during this period are listed in table 6.

Table 6: Tax Expenditures Reported by the U.S. Department of the Treasury (1974 to 2004)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group

National defense

Exclusion of benefits and allowances to armed forces 

personnel 

1974 2004 Exclusion Individual

International affairs

Exclusion of gross-up on dividends of LDC corporations 1974 1976 Exclusion Corporate

Special rate for Western Hemisphere trade corporations 1974 1979 Preferential tax 

rate

Corporate

Deferral of income of domestic international sales corporations 

(DISC)

1974 1985 Deferral Corporate

Exclusion of income earned abroad by U.S. citizens 1974 2004 Exclusion Individual

Deferral of income from controlled foreign corporations (normal 

tax method)

1977 2004 Deferral Corporate

Exclusion of income of foreign sales corporations (FSC) 1984 2000 Exclusion Corporate

Interest allocation rules exception for certain financial 

operations

1986 1995 Deduction Corporate

Inventory property sales source rules exception 1986 2004 Credit Corporate

Deferred taxes for financial firms on certain income earned 

overseas

1998 2004 Deferral Corporate

Exclusion of certain allowances for federal employees abroad 1999 2004 Exclusion Individual

Extraterritorial income exclusion 2000 2004 Exclusion Corporate

General science, space, and technology

Expensing of research and experimentation expenditures 

(normal tax method)

1974 2004 Deferral Individual and 

Corporate

Credit for increasing research activities 1981 2004 Credit Individual and 

Corporate

Suspension of the allocation of research and experimentation 

expenditures

1983 1995 Deduction Corporate
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 111 GAO-05-690 Tax Expenditures

Energy

Capital gains treatment of royalties on coal 1974 2004 Preferential tax 

rate

Individual

Excess of percentage over cost depletion, fuels 1974 2004 Deduction Individual and 

Corporate

Expensing of exploration and development costs, fuels 1974 2004 Deferral Individual and 

Corporate

Residential energy credits 1978 1987 Credit Individual

New technology credit 1978 2004 Credit Corporate

Energy credit for intercity buses 1980 1989 Credit Corporate

Alcohol fuel credits 1980 2004 Credit Individual and 

Corporate

Alternative fuel production credit 1980 2004 Credit Individual and 

Corporate

Exclusion of interest on energy facility bonds 1980 2004 Exclusion Individual and 

Corporate

Exception from passive loss limitation for working interests in 

oil and gas properties

1988 2004 Deduction Individual

Tax credit and deduction for clean-fuel burning vehicles 1992 2004 Credit/ 

Deduction

Individual and 

Corporate

Exclusion of conservation subsidies provided by public utilities 1993 2004 Exclusion Individual

Enhanced oil recovery credit 1994 2004 Credit Individual and 

Corporate

Natural resources and environment

Pollution control: 5-year amortization 1974 1980 Deferral Corporate

Capital gains treatment of certain timber income 1974 2004 Preferential tax 

rate

Individual

Exclusion of interest on bonds for water, sewage, and 

hazardous waste facilities

1975 2004 Exclusion Individual and 

Corporate

Exclusion of payments in aid of construction of water, sewage, 

gas and electric utilities

1976 1981 Exclusion Corporate

Capital gains treatment of iron ore 1977 1997 Preferential tax 

rate

Individual

Tax incentives for preservation of historic structures 1977 2004 Credit Individual and 

Corporate

Investment credit and 7-year amortization for reforestation 

expenditures

1980 2000 Credit/ Deferral Individual

Excess of percentage over cost depletion, nonfuel minerals 1980 2004 Deferral Individual and 

Corporate

Expensing of exploration and development costs, nonfuel 

minerals

1980 2004 Deferral Corporate

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 112 GAO-05-690 Tax Expenditures

Special rules for mining reclamation reserves 1984 1997 Deduction Individual and 

Corporate

Expensing of multiperiod timber growing costs 1986 2004 Deferral Individual and 

Corporate

Expensing of capital costs with respect to complying with EPA 

sulfur regulations

2004 2004 Deferral Corporate

Exclusion of gain or loss on sale or exchange of certain 

brownfield sites

2004 2004 Exclusion Individual and 

Corporate

Agriculture

Capital gain treatment of certain income 1974 2004 Preferential tax 

rate

Individual

Expensing of certain capital outlays 1974 2004 Deferral Individual and 

Corporate

Deductibility of noncash patronage dividends and certain other 

items of cooperatives

1977 1981 Deduction Individual and 

Corporate

Exclusion of certain cost-sharing payments 1978 1981 Exclusion Individual

Special investment tax credit carryback rules for farming 1986 1987 Credit Individual

Expensing of certain multiperiod production costs 1986 2004 Deferral Individual and 

Corporate

Treatment of loans forgiven for solvent farmers 1986 2004 Exclusion Individual

Deferral of 1988 drought-related payments 1988 1990 Deferral Individual

Income averaging for farmers 1997 2004 Preferential tax 

rate

Individual

Deferral of gain on sale of farm refiners 1998 2004 Deferral Corporate

Bio-diesel tax credit 2004 2004 Credit Individual

Commerce and housing credit

Surtax exemption (through 1978) 1974 1980 Preferential tax 

rate

Corporate

Dividend exclusion 1974 1987 Exclusion Individual

Deductibility of interest on consumer credit 1974 1990 Deduction Individual

Deferral of capital gain on home sales 1974 1997 Deferral Individual

Capital gains (except agriculture, timber, iron ore, and coal) 1974 2004 Preferential tax 

rate

Individual

Deductibility of mortgage interest on owner-occupied homes 1974 2004 Deduction Individual

Deductibility of state and local property tax on owner-occupied 

homes

1974 2004 Deduction Individual

Accelerated depreciation of buildings other than rental housing 

(normal tax method) 

1974 2004 Deferral Individual and 

Corporate

Accelerated depreciation on rental housing (normal tax 

method)

1974 2004 Deferral Individual and 

Corporate

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 113 GAO-05-690 Tax Expenditures

Excess bad debt reserves of financial institutions 1974 2004 Deduction Corporate

Exclusion of interest on life insurance savings 1974 2004 Exclusion Individual and 

Corporate

Exemption of credit union income 1974 2004 Exemption Corporate

Credit for purchase of new home 1975 1977 Credit Individual

Excess first year depreciation 1975 1980 Deferral Individual and 

Corporate

Expensing of construction period interest and taxes 1975 1981 Deferral Individual and 

Corporate

Exclusion of interest on small issue bonds 1975 2004 Exclusion Individual and 

Corporate

Exclusion of certain income of cooperatives 1976 1976 Exclusion Individual and 

Corporate

Accelerated depreciation of machinery and equipment 1977 2004 Deferral Individual and 

Corporate

Step-up basis of capital gains at death 1977 2004 Exclusion Individual

Investment credit, other than employee stock ownership plans 

(ESOPs) and rehabilitation of structures, energy property, and 

reforestation expenditures

1978 1990 Credit Corporate

Exclusion of capital gains on home sales for persons age 55 

and over

1978 1997 Exclusion Individual

Exclusion of interest on owner-occupied mortgage subsidy 

bonds

1978 2004 Exclusion Individual and 

Corporate

Graduated corporation income tax rate (normal tax method) 1978 2004 Preferential tax 

rate

Corporate

Amortization of start-up costs 1980 2004 Deferral Individual and 

Corporate

Exclusion of interest on rental housing bonds 1980 2004 Exclusion Individual and 

Corporate

Exclusion of interest on certain savings certificates 1981 1984 Exclusion Individual

Reinvestment of dividends in public utility stock 1981 1986 Exclusion Individual

Safe harbor leasing rules 1981 1990 Deduction/

Credit

Corporate

Net interest exclusion 1983 1983 Exclusion Individual

Small life insurance company deduction 1984 2004 Deduction Corporate

Special investment tax credit carryback rules for steel 

companies

1986 1987 Credit Corporate

Credit for low-income housing investments 1986 2004 Credit Individual and 

Corporate

Exemption of RIC expenses from the 2% floor miscellaneous 

itemized deduction

1987 1993 Deduction Individual

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 114 GAO-05-690 Tax Expenditures

Deferral of income from post 1987 installment sales 1987 2004 Deferral Individual and 

Corporate

Exception from passive loss rules for $25,000 of rental losses 1987 2004 Deduction Individual

Small property and casualty insurance company deduction 1988 1988 Preferential tax 

rate

Corporate

Special merger rules for financial institutions 1988 1990 Deduction Corporate

Treatment of Alaska Native Corporation 1988 1996 Exemption Corporate

Carryover basis of capital gains on gifts 1988 2004 Deferral Individual

Exceptions from imputed interest rules 1988 2004 Exclusion Individual

Special alternative tax on small property and casualty 

insurance companies

1988 2004 Exemption Corporate

Tax exemption of certain insurance companies owned by taxexempt organizations1988 2004 Exemption Corporate

Ordinary income treatment of loss from small business 

corporation stock sale

1989 2004 Deduction Individual

Deferral of gains from sale of broadcasting facilities to minority 

owned business

1990 1995 Deferral Corporate

Cancellation of indebtness 1993 2004 Exclusion Individual

Expensing of certain small investments 1993 2004 Deferral Individual and 

Corporate

Capital gains exclusion of small corporation stock 1994 2004 Exclusion Individual

Capital gains exclusion on home sales 1997 2004 Exclusion Individual

Exclusion of net imputed rental income on owner-occupied 

homes

2004 2004 Exclusion Individual

Deduction for U.S. production activities 2004 2004 Deduction Individual and 

Corporate

Special rules for certain film and TV production 2004 2004 Deduction Individual and 

Corporate

Transportation

Deductibility of nonbusiness state gasoline taxes 1974 1979 Deduction Individual

Five-year amortization on railroad rolling stock 1974 1980 Deferral Corporate

Deferral of tax on shipping companies 1974 2004 Deferral Corporate

Deduction for motor carrier operating rights 1981 1986 Deduction Corporate

Exclusion of interest on state and local government bonds for 

mass commuting vehicles

1981 1990 Exclusion Corporate

Exclusion for employer-provided transit passes 1993 2004 Exclusion Individual

Exclusion of reimbursed employee parking expenses 1993 2004 Exclusion Individual

Tax credit for certain expenditures for maintaining railroad 

tracks

2004 2004 Credit Corporate

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 115 GAO-05-690 Tax Expenditures

Community and regional development

Five-year amortization for housing rehabilitation 1974 1990 Deferral Individual and 

Corporate

Investment credit for rehabilitation of structures (other than 

historic)

1974 2004 Credit Individual and 

Corporate

Exclusion of interest for airport, dock, and similar bonds 1983 2004 Exclusion Individual and 

Corporate

Exemption of certain mutuals and cooperatives income 1989 2004 Exemption Corporate

Empowerment zones, enterprise communities, and renewal 

communities

1993 2004 Credit Individual and 

Corporate

Expensing of environmental remediation costs 1997 2004 Deferral Individual and 

Corporate

New market tax credit 2000 2004 Credit Individual and 

Corporate

Deferral of capital gains with respect of dispositions of 

transmission property 

2004 2004 Deferral Corporate

Education, training, employment, and social services

Child care facilities: 5-year amortization 1974 1975 Deferral Corporate

Credit for employing AFDC recipients and public assistance 

recipients under work incentive program

1974 1982 Credit Individual and 

Corporate

Credit for child and dependent care expenses 1974 2004 Credit Individual

Deductibility of charitable contributions (education) 1974 2004 Deduction Individual and 

Corporate

Deductibility of charitable contributions, other than education 

and health 

1974 2004 Deduction Individual and 

Corporate

Exclusion of employee meals and lodging (other than military) 1974 2004 Exclusion Individual

Exclusion of scholarship and fellowship income 1974 2004 Exclusion Individual

Parental personal exemption for students age 19 or over 1974 2004 Exemption Individual

Maximum tax on personal service income 1975 1980 Exclusion Individual

Investment credit for ESOPs 1976 1990 Credit Corporate

Exclusion of other employee benefits: employer contributions 

to prepaid legal expense plan

1976 1992 Exclusion Individual

Expensing of costs of removing certain architectural barriers to 

the handicapped

1976 1999 Deferral Corporate

General jobs credit 1977 1984 Credit Corporate

Exclusion of employer-provided educational assistance 1978 2004 Exclusion Individual

Work opportunity tax credit 1978 2004 Credit Individual and 

Corporate

Exclusion of interest on student loan bonds 1980 2004 Exclusion Individual and 

Corporate

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 116 GAO-05-690 Tax Expenditures

Deduction for certain adoption expenses 1981 1987 Deduction Individual

Deduction for two earner married couples 1983 1987 Deduction Individual

Employer-provided child care exclusion 1983 2004 Exclusion Individual

Exclusion of interest on bonds for private nonprofit educational 

facilities

1983 2004 Exclusion Individual and 

Corporate

Exclusion of parsonage allowances 1984 2004 Exclusion Individual

Exclusion of certain foster care payments 1988 2004 Exclusion Individual

Exclusion of interest on savings bonds redeemed to finance 

educational expenses

1988 2004 Exclusion Individual

Credit for disabled access expenditures 1990 2004 Credit Individual and 

Corporate

Adoption credit and exclusion 1996 2004 Credit/Exclusion Individual

Child credit 1997 2004 Credit Individual

Credit for holders of zone academy bonds 1997 2004 Credit Corporate

Deductibility of student loan interest 1997 2004 Deduction Individual

State prepaid tuition plans 1997 2004 Exclusion Individual

Education individual retirement accounts 1997 2004 Exclusion Individual

Welfare-to-work tax credit 1997 2004 Credit Individual and 

Corporate

HOPE tax credit 1997 2004 Credit Individual

Lifetime Learning tax credit 1997 2004 Credit Individual

Assistance for adopted foster children 2000 2004 Exclusion Individual

Deduction for higher education expenses 2001 2004 Deduction Individual

Employer-provided child care credit 2001 2004 Credit Corporate

Special deduction for teacher expenses 2003 2004 Deduction Individual

Discharge of student loan indebtedness 2004 2004 Exclusion Individual

Health

Deductibility of medical expenses 1974 2004 Deduction Individual

Exclusion of employer contributions for medical insurance 

premiums and medical care

1974 2004 Exclusion Individual

Deductibility of charitable contributions (health) 1977 2004 Deduction Individual and 

Corporate

Exclusion of interest on hospital construction bonds 1980 2004 Exclusion Individual and 

Corporate

Tax credit for orphan drug research 1982 2004 Credit Corporate

Exclusion of employer share of hospital insurance tax 1988 1992 Exclusion Individual

Special Blue Cross/Blue Shield deduction 1988 2004 Deduction Corporate

Credit for child medical insurance premiums 1990 1993 Credit Individual

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 117 GAO-05-690 Tax Expenditures

Medical Savings Accounts/Health Savings Accounts 1996 2004 Deduction Individual

Workers' compensation insurance premiums 1998 2002 Deduction Individual

Self-employed medical insurance premiums 1998 2004 Deduction Individual

Tax credit for health insurance purchased by certain displaced 

and retired individuals 

2002 2004 Credit Individual

Income security

Excess of percentage standard deduction over minimum 

standard deduction

1974 1977 Deduction Individual

Exclusion on capital gains on home sales for persons age 65 

and over

1974 1979 Exclusion Individual

Exclusion of disability pay 1974 1984 Exclusion Individual

Additional exemption for elderly 1974 1987 Exemption Individual

Additional exemption for the blind 1974 1987 Exemption Individual

Exclusion of untaxed unemployment insurance benefits 1974 1987 Exclusion Individual

Deductibility of casualty losses 1974 2004 Deduction Individual

Exclusion of military disability pensions 1974 2004 Exclusion Individual

Exclusion of other employee benefits: premiums on accident 

and disability insurance

1974 2004 Exclusion Individual

Exclusion of other employee benefits: premiums on group term 

life insurance

1974 2004 Exclusion Individual

Income of trusts to finance supplementary unemployment 

benefits

1974 2004 Exclusion Individual

Exclusion of public assistance benefits 1974 2004 Exclusion Individual

Exclusion of railroad retirement system benefits 1974 2004 Exclusion Individual

Exclusion of worker's compensation benefits 1974 2004 Exclusion Individual

Net exclusion of pension contributions and earnings: employer 

plans

1974 2004 Exclusion Individual

Net exclusion of pension contributions and earnings: individual 

retirement accounts 

1974 2004 Exclusion Individual

Tax credit for the elderly and disabled 1974 2004 Credit Individual

Earned income tax credit 1975 2004 Credit Individual

Exclusion of special benefits for disabled coal miners 1975 2004 Exclusion Individual

Net exclusion of pension contributions and earnings: Keogh 

plans 

1983 2004 Exclusion Individual

Additional deduction for the blind 1986 2004 Deduction Individual

Additional deduction for the elderly 1986 2004 Deduction Individual

Extending tax-exempt organizations status to voluntary 

employee beneficiary and other associations

1988 1990 Exemption Individual

Exclusion of employer provided death benefits 1988 1997 Exclusion Individual

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Appendix IV

Compilation of Tax Expenditures Reported 

by Treasury (1974 to 2004)

Page 118 GAO-05-690 Tax Expenditures

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976-2006.

Note: Names of tax expenditures may have changed over time. Our list includes the most recent name 

reported by Treasury for each tax expenditure. The list of tax expenditures reflects all provisions 

reported by Treasury, including those enacted but effective for future fiscal years. 

Special ESOP rules 1988 2004 Exemption Individual and 

Corporate

Small business retirement plan credit 2001 2004 Credit Individual and 

Corporate

Net exclusion of pension contributions and earnings: 401(k) 

plans

2001 2004 Exclusion Individual

Net exclusion of pension contributions and earnings: low and 

moderate income savers credit 

2001 2004 Exclusion Individual

Social Security

Exclusion of Social Security benefits: dependents and 

survivors

1974 2004 Exclusion Individual

Exclusion of Social Security benefits: disabled 1974 2004 Exclusion Individual

Exclusion of Social Security benefits: retired workers 1974 2004 Exclusion Individual

Veterans’ benefits and services

Exclusion of GI bill benefits 1974 2004 Exclusion Individual

Exclusion of veterans’ death benefits and disability 

compensation 

1974 2004 Exclusion Individual

Exclusion of veterans’ pensions 1974 2004 Exclusion Individual

Exclusion of interest on veterans’ housing bonds 1983 2004 Exclusion Individual and 

Corporate

General Purpose Fiscal Assistance

Credit for corporations in U.S. possessions 1974 1976 Credit Corporate

Deductibility of nonbusiness state and local taxes (other than 

on owner-occupied homes and gasoline)

1974 2004 Deduction Individual

Exclusion of interest on public purpose state and local bonds 1974 2004 Exclusion Individual and 

Corporate

Tax credit for corporations receiving income from doing 

business in U.S. possessions

1977 2004 Credit Corporate

Interest

Deferral of interest on U.S. savings bonds 1975 2004 Deferral Individual

General government

Credits and deductions for political contributions 1974 1987 Credit/

Deduction

Individual

(Continued From Previous Page)

Name of Tax Expenditure

(Organized by Budget Function)

First Year

Reported by

Treasury

Last Year

Reported by

Treasury Type Taxpayer Group
Page 119 GAO-05-690 Tax Expenditures

Appendix V

Glossary ApendxiV

Adjusted gross income (AGI): All income subject to taxation under the 

individual income tax after subtracting above-the-line deductions, such as 

certain contributions for individual retirement accounts and alimony 

payments. Personal exemptions and the standard or itemized deductions 

are subtracted from AGI to determine taxable income.

Alternative Minimum Tax (AMT): A separate tax system that applies to 

both individual and corporate taxpayers. It parallels the regular individual 

income tax system but with different rules for determining taxable income, 

different tax rates for computing tax liability, and different rules for 

allowing the use of tax credits.

Baseline: A benchmark for measuring the budgetary effects of proposed 

changes in federal revenues or spending. Or, a benchmark for identifying 

and measuring exceptions to the basic provisions of the tax structure.

• CBO baseline: CBO’s estimate of spending, revenue, the deficit or 

surplus, and debt held by the public during a fiscal year under current 

laws and current policy. For revenues and mandatory spending, CBO 

projects the baseline under the assumption that present laws continue 

without change. For discretionary spending subject to annual 

appropriations, CBO is required to adjust the current year’s 

discretionary budget authority to reflect inflation, among other factors. 

• Comprehensive income tax baseline: This baseline, also called HaigSimons income, is the real, inflation adjusted, accretion to wealth 

arising between the beginning and ending of the year. It includes all 

accretions to wealth, whether or not realized, whether or not related to 

a market transaction, and whether a return to capital or labor. Inflation 

adjusted capital gains would be included in comprehensive income as 

they accrue. 

• Consumption tax baseline: A broad-based consumption tax is a 

combination of an income tax plus a deduction for net saving. Many 

current tax expenditures related to preferential taxation of capital 

income and savings would not be considered tax preferences under a 

consumption tax (e.g., capital gains), but preferences unrelated to 

broad-based saving or investment incentives would remain tax 

preferences under a consumption baseline.

• Normal income tax baseline: The Budget Act did not specify the 

baseline income tax against which tax preference provisions should be 
Appendix V

Glossary

Page 120 GAO-05-690 Tax Expenditures

measured, and deciding whether provisions are exceptions from the 

normal baseline is a matter of judgment. The normal income tax 

baseline is meant to represent a practical and broad-based income tax 

that reflects the general and widely applicable provisions of the current 

federal income tax. For the individual income tax, the Joint Committee 

on Taxation’s (JCT) normal tax baseline includes one personal 

exemption for each taxpayer, one for each dependent, the standard 

deduction, the existing tax rate schedule, and deductions for investment 

and employee business expenses. Itemized deductions that are not 

necessary for the generation of income but exceed the standard 

deduction level are classified as tax expenditures. Very similar in scope 

to JCT’s normal income tax baseline, Treasury's baseline is patterned 

on, but allows several major departures from, a comprehensive income 

tax, where income is defined as the sum of consumption and the change 

in net wealth during a given period.

• Reference tax law baseline: The reference baseline is closer to 

existing tax law and is also patterned on, but still allows several major 

departures from, a comprehensive income tax. Thus fewer tax 

provisions are considered tax preferences under the reference tax 

baseline than under the normal tax baseline. These include the lower 

tax rate for certain corporations, preferential rates on capital gains, 

accelerated depreciation, deferral of tax on income from controlled 

foreign corporations, etc. 

Budget function: One of 20 broad categories into which budgetary 

resources are grouped so that all budget authority and outlays can be 

presented according to the national interests being addressed. There are 

17 broad budget functions, including national defense, international affairs, 

energy, agriculture, health, income security, and general government. 

Three other functions—net interest, allowances, and undistributed 

offsetting receipts—are included to complete the budget. 

De minimis rule: The level of revenue loss below which a revenue loss 

estimate is not reported for a tax preference.

Direct loans: A disbursement of funds by the government to a nonfederal 

borrower under a contract that requires the repayment of such funds with 

or without interest.

Discretionary spending: Outlays controlled by appropriation acts, other 

than those that fund mandatory programs.
Appendix V

Glossary

Page 121 GAO-05-690 Tax Expenditures

Entitlement authority: Authority to make payments (including loans and 

grants) for which budget authority is provided in advance by 

appropriations acts to any person or government if, under the provisions of 

the law containing such authority, the U.S. government is obligated to make 

the payments to persons or governments who meet the requirements 

established by law.

Government Performance and Results Act (GPRA): Enacted in 1993, 

GPRA, also known as the Results Act, intends to improve the efficiency and 

effectiveness of federal programs by requiring federal agencies to develop 

strategic plans, annual performance plans, and annual program 

performance reports.

Grants: A federal financial assistance award making payment in cash or in 

kind for a specified purpose. The federal government is not expected to 

have substantial involvement with the state or local government or other 

recipient while the contemplated activity is being performed.

Gross domestic product (GDP): The value of all final goods and services 

produced within the borders of a country such as the United States during a 

given period. The components of GDP are consumption expenditures (both 

personal and government), gross investment (both private and 

government), and net exports.

Mandatory spending: Also known as direct spending. Mandatory 

spending includes outlays for entitlement authority (for example, the food 

stamp, Medicare, and veterans’ pension programs), payment of interest on 

the public debt, and nonentitlements such as payments to the states from 

Forest Service receipts. By defining eligibility and setting the benefit or 

payment rules, the Congress controls spending for these programs 

indirectly rather than directly through appropriations acts.

Tax expenditure: A revenue loss attributable to a provision of the federal 

tax laws that grants special tax relief designed to encourage certain kinds 

of behavior by taxpayers or to aid taxpayers in special circumstances. The 

Congressional Budget and Impoundment Control Act of 19741

 lists six 

types of tax expenditures: exclusions, exemptions, deductions, credits, 

preferential tax rates, and deferral of tax liability. 

1

Pub. L. No. 93-344, July 12, 1974.
Appendix V

Glossary

Page 122 GAO-05-690 Tax Expenditures

• Preferential tax rates: A reduction of the tax rate on some forms of 

income, such as capital gains. 

• Tax credit: An amount that offsets or reduces tax liability. When the 

allowable tax credit amount exceeds the tax liability, and the difference 

is paid to the taxpayer, the credit is considered refundable. Otherwise, 

the difference can be (1) allowed as a carryforward against future tax 

liability, (2) allowed as a carryback against past taxes paid, or (3) lost as 

a tax benefit.

• Tax deduction: An amount that is subtracted from the tax base before 

tax liability is calculated. Deductions claimed before and after the 

adjusted gross income line on the Form 1040 are sometimes called 

“above-the-line” and “below-the-line” deductions, respectively.

• Tax deferral: A provision allowing taxpayers to reduce current tax 

liability by delaying recognition of some income or accelerating some 

deductions otherwise attributable to future years. This can increase the 

taxpayer’s future tax liability, as the deferred income is eventually 

recognized, or reduce the deductions available on future income.

• Tax exclusion: An item of income that would otherwise constitute a 

part of the taxpayer’s gross income, but is excluded under a specific 

provision of the tax code. Exclusions generally do not appear on the 

U.S. Individual Income Tax Return (Form 1040), and excluded income is 

not reflected in total reported income.

• Tax exemption: A reduction in taxable income offered to taxpayers 

because of their status or circumstances.

Tax expenditure revenue loss estimate: The measure of the revenue 

cost of each tax expenditure. The revenue cost is the difference between 

tax liability under current law and the tax liability that would result if taxes 

were recomputed without that tax expenditure. Revenue cost estimates 

assume (1) economic behavior does not change, and (2) all other tax 

expenditures remain in the code unchanged.

Tax expenditure outlay-equivalent estimate: The amount of budget 

outlays that would be required to provide the taxpayer the same after-tax 

income as would be received through the tax provision. The outlayequivalent measure allows the cost of a tax preference to be compared with 
Appendix V

Glossary

Page 123 GAO-05-690 Tax Expenditures

a direct federal outlay, were each to provide the same benefit to the 

taxpayer.

Unified budget: A comprehensive budget in which receipts and outlays 

from federal funds and trust funds are consolidated; generally a cash or 

cash equivalent measure in which receipts are recorded when received and 

expenditures are recorded when paid, regardless of the accounting period 

in which the receipts are earned or the costs incurred.
Page 124 GAO-05-690 Tax Expenditures

Appendix VI

GAO Contact and Acknowledgments ApendxiVI

GAO Contact Michael Brostek, (202) 512-9110

Acknowledgments In addition to the individual named above, MaryLynn Sergent, Assistant 

Director, as well as Eric Gorman, Edward Nannenhorn, Anne Stevens, and 

Lynn Wasielewski made key contributions to this report. Other individuals 

also contributing to this report included Ellen Grady, Susan Irving, Shirley 

Jones, Donna Miller, Amy Rosewarne, and William Trancucci.
Page 125 GAO-05-690 Tax Expenditures

Selected Bibliography

Attanasio, Orazio P. and Thomas DeLeire. “The Effect of Individual 

Retirement Accounts on Household Consumption and National Saving,” 

The Economic Journal, Vol. 112 (July 2002): 504-538.

Brixi, Hana Polackova, Christian M.A. Valenduc, and Zhicheng Li Swift. Tax 

Expenditures—Shedding Light on Government Spending through the Tax 

System: Lessons from Developed and Transition Economies. Washington, 

D.C.: The World Bank, October 2003.

Burman, Leonard E. “Is the Tax Expenditure Concept Still Relevant?” The 

National Tax Journal. vol. LVI, No. 3, (September 2003).

Burman, Leonard E. and Jonathan Gruber. “Tax Credits for Health 

Insurance,” Tax Policy Center Discussion Paper No. 19. Washington, D.C.: 

The Tax Policy Center, June 2005.

Carasso, Adam and Eugene Steuerle. “Tax Expenditures: Revenue Loss 

Versus Outlay Equivalents.” Tax Notes, Vol. 7, (October 13, 2003).

Datta, Lois-ellin and Patrick G. Gasso. Evaluating Tax Expenditures: Tools 

and Techniques for Assessing Outcomes. San Francisco, Calif.: American 

Evaluation Association, 1998.

National Taxpayer Advocate. 2004 Annual Report to Congress.

Washington, D.C.: December 31, 2004.

President’s Advisory Panel on Federal Tax Reform. “Understanding Tax 

Bases: Staff Presentation,” (presentation before the Panel’s public meeting, 

Washington, D.C., July 20, 2005, 

http://taxreformpanel.gov/meetings/docs/understanding_tax_bases.ppt

(downloaded September 13, 2005).

Rivlin, Alice M. and Isabel Sawhill. Restoring Fiscal Sanity 2005: Meeting 

the Long-Run Challenge. Washington, D.C.: The Brookings Institution, 

2005. 

Salamon, Lester M. The Tools of Government: A Guide to the New 

Governance. New York, N.Y.: Oxford University Press, Inc., 2002.

Sheils, John and Randall Haught. “The Cost of Tax-Exempt Health Benefits 

in 2004.” Health Affairs, (February 25, 2004).
Selected Bibliography

Page 126 GAO-05-690 Tax Expenditures

Slemrod, Joel and Jon Bakija. Taxing Ourselves: A Citizen's Guide to the 

Debate Over Taxes, 3rd Edition. Cambridge, Mass.: The MIT Press, 2004.

Toder, Eric J. "Tax Cuts or Spending-Does It Make a Difference?" National 

Tax Journal, Vol. LIII, No. 3, Part 1. (September 2000). 

Toder, Eric J. The Changing Composition of Tax Incentives: 1980-99. 

Washington, D.C.: (The Urban Institute), March 1, 1999.

U.S. Congressional Budget Office. Budget Options. Washington, D.C.: 

February 2005.

U.S. Congressional Budget Office. The Budget and Economic Outlook: An 

Update. Washington, D.C.: August 2005.

U.S. Congressional Budget Office. The Long-Term Budget Outlook. 

Washington, D.C.: December 2003. 

U.S. Congress. Joint Committee on Taxation. Estimates of Federal Tax 

Expenditures For Fiscal Years 2005-2009. JCS-1-05. Washington, D.C.: 

January 12, 2005.

U.S. Congress. Joint Committee on Taxation. Options to Improve Tax 

Compliance and Reform Tax Expenditures. JCS-2-05. Washington, D.C.: 

January 27, 2005.

U.S. Congress. Joint Economic Committee. Tax Expenditures: A Review 

and Analysis. Washington, D.C.: August 1999.

U.S. Congress. Senate Committee on the Budget. Tax Expenditures: 

Compendium of Background Material on Individual Provisions. S. Prt. 

108-54. Washington, D.C.: December 2004.

U.S. Congress. Senate Committee on Governmental Affairs. Government 

Performance and Results Act of 1993 (P.L. 103-58). Washington, D.C.: 

June 15, 1993.

U.S. Office of Management and Budget. “Tax Expenditures,” Analytical 

Perspectives, Budget of the United States Government, Fiscal Year 2006

Washington, D.C.: 2005.
Page 127 GAO-05-690 Tax Expenditures

Related GAO Products

Tax Policy and IRS 

Administration

Understanding the Tax Reform Debate: Background, Criteria, and 

Questions. GAO-05-1009SP. Washington, D.C.: September 13, 2005.

Internal Revenue Service: Status of Recommendations from Financial 

Audits and Related Financial Management Reports. GAO-05-393. 

Washington, D.C.: April 29, 2005.

Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial 

Statements. GAO-05-103. Washington, D.C.: November 10, 2004.

Tax Administration: IRS Should Reassess the Level of Resources for 

Testing Forms and Instructions. GAO-03-486. Washington, D.C.: April 11, 

2003.

Tax Administration: IRS Should Continue to Expand Reporting on Its 

Enforcement Efforts. GAO-03-378. Washington, D.C.: January 31, 2003.

Tax Administration: Impact of Compliance and Collection Program 

Declines on Taxpayers. GAO-02-674. Washington, D.C.: May 22, 2002.

Tax Deductions: Further Estimates of Taxpayers Who May Have 

Overpaid Federal Taxes by Not Itemizing. GAO-02-509. Washington, D.C.: 

March 29, 2002.

Tax Policy: Tax Expenditures Deserve More Scrutiny. GAO/GGD/AIMD94-122. Washington, D.C.: June 3, 1994.

Specific Tax Expenditures Climate Change: Federal Reports on Climate Change Funding Should Be 

Clearer and More Complete. GAO-05-461. Washington, D.C.: August 25, 

2005.

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.

Earned Income Tax Credit: Implementation of Three New Tests Proceeded 

Smoothly, But Tests and Evaluation Plans Were Not Fully Documented. 

GAO-05-92. Washington, D.C.: December 30, 2004.
Related GAO Products

Page 128 GAO-05-690 Tax Expenditures

Community Development: Federal Revitalization Programs are Being 

Implemented, but Data on the Use of Tax Benefits Are Limited. GAO-04-

306. Washington, D.C.: March 5, 2004.

Tax Administration: IRS Issued Advance Child Tax Credit Payments on 

Time but Should Study Lessons Learned. GAO-04-372. Washington, D.C.: 

February 17, 2004.

New Markets Tax Credit Program: Progress Made in Implementation, but 

Further Actions Needed to Monitor Compliance. GAO-04-326. 

Washington, D.C.: January 30, 2004.

Tax Administration: Information Is Not Available to Determine Whether 

$5 Billion in Liberty Zone Tax Benefits Will Be Realized. GAO-03-1102. 

Washington, D.C.: Sept. 30, 2003.

Business Tax Incentives: Incentives to Employ Workers with Disabilities 

Receive Limited Use and Have an Uncertain Impact. GAO-03-39. 

Washington, D.C.: December 11, 2002.

New Markets Tax Credit: Status of Implementation and Issues Related to 

GAO’s Mandated Reports. GAO-03-223R. Washington, D.C.: December 6, 

2002.

Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not 

Met Annual Reporting Requirement. GAO-03-91. Washington, D.C.: 

November 15, 2002.

Student Aid and Tax Benefits: Better Research and Guidance Will 

Facilitate Comparison of Effectiveness and Student Use. GAO-02-751. 

Washington, D.C.: Sept. 13, 2002.

Tax Policy and Administration: Review of Studies of the Effectiveness of 

the Research Tax Credit. GAO/GGD-96-43. Washington, D.C.: May 21, 1996.

Federal Budget Our Nation’s Fiscal Outlook: The Federal Government’s Long-Term 

Budget Imbalance. http://www.gao.gov/special.pubs/longterm/.

21st Century Challenges: Performance Budgeting Could Help Promote 

Necessary Reexamination. GAO-05-709T. Washington, D.C.: June 14, 2005.
Related GAO Products

Page 129 GAO-05-690 Tax Expenditures

Management Reform: Assessing the President’s Management Agenda. 

GAO-05-574T. Washington, D.C.: April 21, 2005.

Long-Term Fiscal Issues: Increasing Transparency and Reexamining the 

Base of the Federal Budget. GAO-05-317T. Washington, D.C.: February 8, 

2005.

21st Century Challenges: Reexamining the Base of the Federal 

Government. GAO-05-325SP. Washington, D.C.: February 2005.

Performance Budgeting: Efforts to Restructure Budgets to Better Align 

Resources with Performance. GAO-05-117SP. Washington, D.C.: February 

2005.

Opportunities for Congressional Oversight and Improved Use of 

Taxpayer Funds: Budgetary Implications of Selected GAO Work. GAO-04-

649. Washington, D.C.: May 7, 2004.

Budget Process: Long-term Focus Is Critical. GAO-04-585T. Washington, 

D.C.: March 23, 2004.

Results-Oriented Government: GPRA Has Established a Solid Foundation 

for Achieving Greater Results. GAO-04-38. Washington, D.C.: March 10, 

2004.

Performance Budgeting: Observations on the Use of OMB’s Program 

Assessment Rating Tool for the Fiscal Year 2004 Budget. GAO-04-174. 

Washington, D.C.: January 30, 2004.

Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs 

and Uncertainties. GAO-03-213. Washington, D.C.: January 24, 2003.

Federal Budget: Opportunities for Oversight and Improved Use of 

Taxpayer Funds. GAO-03-1030T. Washington, D.C.: July 17, 2003.

Performance Budgeting: Current Developments and Future Prospects. 

GAO-03-595T. Washington, D.C.: April 1, 2003.

National Saving: Answers to Key Questions. GAO-01-591SP. Washington, 

D.C.: June 2001.

(450260)
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