Tax Expenditures: Opportunities Exist to Use Budgeting and Agency Performance Processes to Increase Oversight
Released: 2016-07-07T00:00:00

Letter

Background

Definition and Objectives of Tax Expenditures

Tax expenditures are tax provisions that are exceptions to the normal structure of individual and corporate income tax necessary to collect federal revenue. They represent revenue losses—the amount of revenue that the government forgoes—resulting from federal tax provisions that grant special tax relief for certain kinds of behavior by taxpayers or for taxpayers in special circumstances. For example, some tax expenditures are used to provide economic relief to selected groups of taxpayers, such as the elderly, the blind, and parents or guardians of children. Policymakers have also long used tax expenditures as a tool to accomplish national social and economic goals, such as encouraging people to save for retirement, promoting home ownership or investments, and funding certain research and development. Such goals are often similar to those of mandatory and discretionary spending programs, and tax expenditures may be used in combination with these types of spending to achieve national objectives.

The Congressional Budget and Impoundment Control Act of 1974 identified six types of tax provisions that are considered tax expenditures when they are exceptions to the normal tax structure, as described in figure 1.

The term tax expenditure has been used in the federal budget for four decades, and the tax expenditure concept is a tool that the federal government uses to allocate resources and achieve national priorities. In effect, many tax expenditures can be viewed as spending channeled through the tax code in that the federal government “spends” some of its revenue by forgoing taxation on some income. Many tax expenditures are comparable to mandatory spending programs, for which spending is determined by rules for eligibility, benefit formulas, and other parameters. Other tax expenditures, such as the low-income housing tax credit, resemble discretionary spending programs, for which Congress appropriates specific funding each year. Nonetheless, deciding whether a specific tax provision should be characterized as a tax expenditure is a matter of judgment, and disagreements about classification stem from different views about what should be included in the normal income tax structure. For example, some argue that the distinction between tax provisions labeled as tax expenditures, and provisions that are not, is arbitrary; thus, labeling some provisions as tax expenditures implies that all income inherently belongs to the government and could be taxed.

Fiscal Effect of Tax Expenditures

Tax expenditures have a significant effect on overall tax rates as well as the budget outlook. The revenue the federal government forgoes from tax expenditures reduces the tax base and requires higher tax rates to raise any given amount of revenue. In addition, tax expenditures, like any federal program spending, reduce the amount of funding available for other federal activities, increase the budget deficit, or reduce any budget surplus. In recent fiscal years, revenue losses from tax expenditures have been similar to discretionary spending levels (see figure 2).

Treasury’s Office of Tax Analysis and the congressional Joint Committee on Taxation (JCT) each annually compile their own lists of tax expenditures and estimates of their revenue losses. They estimate revenue losses for a specific tax expenditure by comparing the revenue raised under current law with the revenue that would have been raised if that provision did not exist, assuming all other parts of the tax code remain constant and taxpayer behavior is unchanged. However, tax expenditures’ revenue loss estimates do not necessarily represent the exact amount of revenue that would be gained if a specific tax expenditure was repealed, since repeal of the tax expenditure could change taxpayer behavior in some way that would affect revenue. While, in general, the tax expenditures lists Treasury and JCT publish annually are similar, Treasury and JCT also have different methods for estimating tax expenditures, which can result in differing estimates.

Federal Budgeting Processes

Federal budgeting processes provide the means for the government to make informed decisions about priorities across competing national needs and policies, and to allocate resources to those priorities. For the purposes of this report, federal budgeting processes can be broken down into three major phases: executive budget formulation, congressional budgeting processes (during which Congress adopts its budget and enacts laws appropriating funds for the fiscal year), and evaluation.

Executive budget formulation. Every year, the President is required to compile and submit a budget to Congress for consideration, a process which OMB manages with the assistance of agencies. During the formulation of the President’s budget, discretionary spending is reviewed in detail and funding levels are proposed for existing and new discretionary programs. In addition, mandatory spending or new revenue provisions may be proposed.

Congressional budgeting processes. Once Congress receives the President’s budget request, it begins its own process to enact a budget for the U.S. government. This process includes developing appropriations legislation for discretionary spending; proposing authorizing legislation to establish or continue the operation of federal programs or agencies; and proposing revenue measures, including tax expenditures, which can be either permanent or temporary.

Two of the major phases of federal budgeting—executive budget formulation and congressional budgeting processes—are further described in figure 3.

Evaluation. GPRA and subsequently GPRAMA established a performance planning and reporting framework for the federal government. This framework provides important tools that can help inform congressional and executive branch decision making to address challenges the federal government faces, including the allocation of scarce resources across different policy tools. GPRAMA requires that OMB and agencies establish different types of government-wide and agency goals, including:

Cross-agency priority (CAP) goals. These are government-wide, outcome-oriented goals—for example, improving science, technology, engineering and math education—that cover a limited number of policy areas, as well as goals for management improvements needed across the government, such as delivering world-class customer service. OMB develops these goals in coordination with agencies.

Strategic objectives. These are long-term agency goals that reflect the outcome or management impact an agency is trying to achieve, and express the results or direction the agency will work toward. To illustrate, one of the strategic objectives identified in HUD’s 2014-2018 strategic plan is to ensure sustainable investments in affordable rental housing.

Agency priority goals (APG). These are near-term goals to reflect agencies’ highest priorities and represent an achievement that agency leaders want to accomplish within 2 years through focused leadership attention. They are to have clear completion dates, targets, and indicators that can be measured or marked by a milestone to gauge process. GPRAMA requires that agencies identify how their respective APGs contribute to their long-term strategic goals. To illustrate, one of HUD’s APGs is to preserve and expand affordable rental housing to serve around 135,000 more households in fiscal years 2016 and 2017 than the baseline 5.5 million households already served.

Under GPRAMA, OMB is to develop a federal government performance plan that sets the level of performance needed to achieve the CAP goals. In doing so, OMB is to identify the organizations, programs, and activities—including tax expenditures—that contribute to those goals. In addition, OMB is to periodically review and report on progress toward these goals. As part of these reviews, OMB is to assess whether the programs and activities—including tax expenditures—are contributing to the goals as planned. We have previously reported on OMB’s implementation of these requirements. OMB has tasked agencies with responsibility for identifying applicable tax expenditures for reporting progress on agencies’ priority goals and strategic objectives in GPRAMA guidance.

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

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

While tax expenditures are included in the development of the President’s Budget, they are subject to fewer reviews, and less information is required to be provided on them. See figure 4 for a summary of key steps and how tax expenditures compare to spending in the executive budget formulation process.

Tax expenditures and spending are treated differently in the first key step of the executive budget formulation process, where agencies prepare budget proposals to submit to OMB.

OMB Circular No. A-11 requires that agencies provide written justifications for all discretionary and mandatory spending programs and activities of an agency, but does not require such written justification for existing tax expenditures. Further, under OMB Circular No. A-11, agencies are directed to submit less detailed information to justify new or modified tax expenditures than when they propose new spending programs to OMB. For example, OMB Circular No. A-11 directs agencies to provide, among other things, an analysis of financial and personnel resources required to enact a program, a comparison of total program benefits and costs, and supporting information from outside evaluation and analyses for spending programs. In contrast, for tax expenditure proposals, agencies are not directed to provide such detailed analyses in their written justifications. Instead, they are directed to generally justify why a tax expenditure is needed and why it is preferable to a spending program.

OMB Review of Budget Proposals

After agencies submit their budget proposals, OMB and the President review them and decide what proposals and programs will be submitted to Congress. Because agencies are not directed to include a written justification of existing tax expenditures in their budget proposals, such information is not included in this step.

OMB staff told us that tax expenditures are one of several policy tools considered when discussing new legislative proposals for the President’s budget. Treasury officials reported that an extensive process is conducted with OMB annually to develop the President’s revenue proposals, including tax expenditures, with a particular focus on expiring provisions. We asked OMB staff the extent to which tax expenditures are included in its budget-related discussions with Treasury officials, but staff declined to respond, stating that such information was predecisional.

Approval and Submission of the President’s Budget

OMB then prepares the President’s budget, which presents aggregate spending and revenue levels and contains the President’s spending and revenue proposals. The President then approves the budget and submits it to Congress. Although tax expenditures contribute to budget functions, the tax expenditure estimates are not presented alongside summaries of other spending levels by functional category in the budget. Instead, tax expenditure revenue loss estimates are presented separately from other types of spending in the budget’s Analytical Perspectives. We have reported in the past that this presentation makes their relative contributions toward achieving national priorities less visible than spending programs.

Tax expenditure proposals, which include both new tax expenditures and amendments to existing tax expenditures, are included in a separate chapter alongside other revenue proposals, though the budget does not identify which proposals are tax expenditures. The budget includes a short description of the proposal, along with a revenue estimate of each particular proposal. Descriptions of discretionary and mandatory spending and the President’s requests for those funds are also included in the budget Appendix, along with the outlays from refundable tax credits.

Agency Budget Justifications

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

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

As part of the congressional budget process, tax expenditures are treated similarly to mandatory spending in that expiring tax expenditures being considered for extension and new proposals are subject to standard congressional controls for new legislation; but existing, non-expiring tax expenditures are not subject to annual congressional budget processes. In addition, while discretionary and mandatory spending are included in the Concurrent Resolution on the Budget (budget resolution), existing tax expenditures are not explicitly included, though the budget resolution may propose changes to tax expenditures or mandatory spending at Congress’s discretion. See figure 5 for a summary of key steps and how tax expenditures compare to spending in the congressional budget process.

As part of the annual budget process, House and Senate Budget committees develop a budget resolution, which sets budget authority in aggregate and by functional category, as well as target aggregate revenues. Unlike with mandatory and discretionary spending, tax expenditures’ fiscal effects are not explicitly included in the budget resolution. Rather, the aggregate revenue targets takes into account that revenue will be forgone because of tax expenditures. Through reconciliation instructions, the resolution may direct committees to propose legislation to meet the spending and revenue targets set by the budget resolution. The resolution is not required to propose adjustments to tax expenditures or mandatory spending through these instructions to meet those targets, though it may do so. The proposal is voted on by both budget committees and the full House and Senate. As a plan for Congress, the resolution is not presented to the President for signature and does not have the force of law, but guides the work of the appropriations, authorizing, and tax-writing committees, whose legislation is evaluated against the resolution’s targets.

Appropriations Committees

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

Authorizing Committees

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

Tax-writing Committees

Also separate from the annual appropriations process, tax-writing committee legislation includes tax expenditure extensions and proposals. Revenue legislation may establish a tax expenditure indefinitely or for specific periods. Tax expenditures are not required to be reapproved unless they are set to expire, though changes may be proposed in any year.

Currently, there are budget controls both in statute and in congressional rules that apply to spending and tax expenditure legislation. Pay-as-you- go (PAYGO) rules generally require that any law that would increase mandatory spending or decrease revenues make an additional change in spending or revenues so that the new law does not increase the deficit. For example, the Statutory PAYGO Act of 2010 requires OMB to record the budget effects of all of the revenue and direct spending legislation on scorecards to project budgetary effects of the legislation over 5- and 10- year periods. Sometimes this control is exempted by law, as was done in the Protecting Americans from Tax Hikes Act of 2015, which made various tax expenditures permanent. Both the House and the Senate have PAYGO rules. While the House’s PAYGO rule addresses only direct spending, the Senate PAYGO rule prohibits consideration of direct spending or revenue legislation that could increase the deficit in current and future years.

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

OMB Circular No. A-11 directs agencies to identify tax expenditures, as appropriate, among the various federal programs and activities that contribute to their agency goals, specifically strategic objectives and agency priority goals (APG). Agencies are also required to review progress toward their goals. For strategic objectives, reviews are to occur annually in order to inform annual planning and budget formulation, among other things. For APGs, agency leaders are required to review APG progress in quarterly, data-driven performance reviews. In its guidance, OMB states that tax expenditures should be subject to the same level of review as spending programs, and often complement or substitute for agencies’ spending programs that contribute to their strategic objectives. OMB also directs agencies to work with Treasury’s Office of Tax Analysis (OTA) to develop data and methods to evaluate the effects of tax expenditures that affect, or are directed toward, the same goals as agency programs.

Our review of agencies’ performance planning and reporting documents found that most agencies did not identify tax expenditures as contributors to agency goals, consistent with what we have reported previously. We found that 7 of the 24 CFO Act agencies identified tax expenditures as contributors to their missions (two instances) or to specific goals (five instances). The tax expenditures these seven agencies identified accounted for 11 of the 169 tax expenditures included in the President’s Budget for Fiscal Year 2017, representing an estimated $31.9 billion of $1.23 trillion in forgone revenues for fiscal year 2015. In addition, three of these seven agencies developed performance measures to gauge the contributions of tax expenditures towards progress on agency goals. See figure 6 for a summary of the tax expenditures identified as contributing to agency goals or missions.

One commonality among agencies that linked tax expenditures to performance measures is that many of these agencies have a defined role in administering the related tax expenditures, and therefore collect data on the tax expenditures. See table 1 for a summary of the agencies that identified tax expenditures contributing to agency missions and goals in their performance documents as of January 2016.

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

As we have previously reported, one key impediment to including tax expenditures in agency performance reviews is the continuing lack of clarity about the roles of different federal agencies in conducting reviews of tax expenditures. This lack of clarity can lead to inaction in identifying tax expenditures’ contributions to agency goals.

Office of Tax Analysis (OTA). Treasury’s OTA provides economic and policy analyses leading to development of the President’s tax proposals. It also assesses major congressional tax proposals, which can include tax expenditures. OTA prepares Treasury’s revenue and revenue loss estimates for tax proposals and tax expenditures, respectively. According to OTA officials, OTA does not conduct systematic reviews of tax expenditures, but may conduct them when policymakers are considering changes to tax policy.

Internal Revenue Service (IRS). As Treasury’s bureau responsible for determining, assessing, and collecting taxes, IRS administers and supervises the execution and application of internal revenue laws or related statutes, including for tax expenditures. However, IRS is not responsible for managing federal housing, energy, or any of the many other policies to which tax expenditures may contribute. At times, this can lead to insufficient oversight of tax expenditures. For example, in July 2015, we reported that IRS conducted minimal oversight of state housing finance agencies (HFA), on which IRS relies to administer and oversee the low-income housing tax credit. We found that IRS conducted minimal oversight in part because the tax credit is a peripheral program for IRS, in terms of its compliance responsibilities, mission, and priorities for resources and staffing. As part of that report, we suggested Congress consider designating HUD as a joint administrator of the program, including responsibilities for HFA oversight.

Other agencies. If agencies do not have a defined role in administering a tax expenditure, they may choose not to identify the tax expenditure’s contributions to agency goals. At the three agencies we selected to interview—USDA, DOE, and HUD—officials reported that they sometimes do not include tax expenditures as contributors to goals in their performance processes or reporting, because the agencies do not have a defined role in administering the tax expenditures. For example, in HUD’s fiscal year 2016 Performance Plan and fiscal year 2014 Performance Report, the agency describes a strategic objective involving “green and healthy homes.” Though HUD does not identify related tax expenditures, agency officials told us they understood that many homeowners and residential property owners who undertake energy efficiency retrofits or install solar panels take advantage of, or benefit from, energy-related tax credits, particularly for solar investment. Agency officials explained that HUD publishes resources on its web portal on renewable energy to help owners walk through the steps of financing options, some of which include tax credits. Officials at all three agencies we spoke to said that their performance conversations focused on programs they administer, which was why tax expenditures were not always included.

OMB staff told us they give agencies flexibility to determine the appropriate programs and tax expenditures that should be identified as contributors to agency goals. They also said that it is the agencies’ responsibility to incorporate tax expenditures, as appropriate, in their progress updates for agency goals, and that they do not provide any further clarity on agencies’ roles. Further, OMB staff told us that they do not track agencies’ identification of tax expenditures that contribute to agency goals. As a consequence, OMB does not have a process in place to determine the extent to which agencies are capturing the contributions of all federal commitments, including tax expenditures, toward agency goals.

Given OMB’s government-wide purview and Treasury’s familiarity with administering the tax code, these agencies are well positioned to assist other agencies in identifying tax expenditures that contribute to their goals. To assist agencies, OMB’s 2013 and 2014 Circular No. A-11 guidance noted that OMB would work with Treasury and agencies to identify where tax expenditures align with their goals, and that this information was to be published on Performance.gov and included in relevant agency plans, beginning in February 2014. However, OMB subsequently removed the language about working with Treasury and agencies to align tax expenditures with agency goals in the June 2015 update to its guidance. OMB staff told us they removed the language because the agency had no immediate plans for focusing on this effort, nor did they have the capacity to consider it, despite seeing the benefit of such an effort. Without additional OMB and Treasury assistance, agencies may continue to have difficulty identifying whether, or which, tax expenditures contribute to their goals.

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

We have reported previously that challenges with performance measurement limit agencies’ ability to identify the contributions of tax expenditures to agency goals, and our work found that those challenges for agencies continue to exist.

In September 2005, we found that a lack of performance information was a challenge in assessing the performance of tax expenditures. We recommended that OMB, in consultation with Treasury, identify ways to address the lack of credible tax expenditure performance information. The President’s fiscal year 2012 budget stated that the administration planned to focus on addressing some of these data- availability challenges and analytical constraints so it can work toward crosscutting analyses that examine tax expenditures alongside related spending programs; however, as of February 2016, OMB had not provided an update on these efforts.

In June 2013, we found that agencies face difficulties in measuring performance across various program types, including tax expenditures. We recommended that OMB work with the Performance Improvement Council (PIC) to develop a detailed approach to examine difficulties agencies face in measuring the performance of these various types of federal programs and activities, including identifying and sharing any promising practices from agencies that have overcome difficulties in measuring the performance of these program types. While OMB and PIC officials reported that they have taken some steps to address this recommendation in a few areas, as of June 2016, they have not yet developed a comprehensive and detailed approach to address these issues as envisioned in our report, and these efforts have not included tax expenditures.

We continue to believe that implementing these recommendations would help agencies evaluate how tax expenditures contribute to agency goals.

One factor that continues to impede agencies’ abilities to assess the contributions of tax expenditures to their goals is the limited availability of tax expenditure data.

Officials from Treasury and the three agencies—USDA, DOE, and HUD—that we selected to interview told us that limited tax data can be a barrier to conducting performance reviews or analyzing tax expenditures.

We reported in April 2013 that tax forms did not capture who claimed a tax expenditure and how much they claimed for 63 percent of tax expenditures in 2011. Likewise, we have reported that tax expenditure data that are collected on tax forms are not always sufficiently detailed to assess or describe tax expenditure results. For example, in April 2015, we found that IRS data did not include key project-level information on the Investment Tax Credit and Production Tax Credit, which is necessary to describe how many projects these credits supported and to evaluate the credits’ effectiveness.

We reported in April 2013 that these data challenges can be remedied to some extent by data from other agencies or other sources, such as public records, state agency records, and surveys. However, these solutions do not completely overcome the data challenges associated with evaluating tax expenditures. For example, we reported that HUD community level data can be used to partially remedy limited IRS tax data on Empowerment Zone (EZ) employment tax credits, which did not identify which specific communities received EZ tax credits. However, HUD only tracks a portion of EZ employment tax credits, and thus its data do not completely mitigate the limitations of tax form data in identifying which communities benefit from EZ tax credits.

For some tax expenditures, evaluating performance may require collecting additional tax form data. For example, in April 2015, we reported that because basic information on the Investment Tax Credit and Production Tax Credit is unavailable, it will be difficult for Congress to evaluate the effectiveness of these tax credits or compare them with spending or loan programs as it considers reauthorizing or extending them. We suggested that Congress consider directing IRS to collect additional tax form data to help evaluate the effectiveness of the credits.

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

Further incorporating tax expenditures into federal budgeting processes could help achieve various broad benefits, based on our assessment of the roundtable discussion we held with budget and tax experts and on our prior work (see figure 7).

Below we discuss options that may help achieve these broad benefits. We identified the options based on insights from experts during our roundtable discussion and interviews—as well as related literature—and our prior work. For each option, we indicate the broad benefit— additional transparency, opportunity for review, or greater control—that could be achieved, and issues that policymakers would need to consider when evaluating the merits of each option (which we present below as design considerations). We do not assess the relative feasibility of these options, nor do we recommend implementing any of these options in this report. Finally, these options are not exhaustive, nor are they mutually exclusive, as some options could be implemented together and may even complement each other.

While these options offer a range of potential benefits, there are challenges and tradeoffs for policymakers to consider in whether or how to implement any policy to further incorporate tax expenditures into federal budgeting processes. For example, agency officials and experts said that implementing these options—in particular those requiring additional information on, or reviews of, tax expenditures—would require resources. Moreover, as previously mentioned, and as experts told us, there is not always a consensus on which tax provisions constitute tax expenditures. Finally, it is difficult to measure the size of some tax expenditures that are only loosely linked to actual tax filing data. While the JCT and Treasury use modeling to estimate tax expenditure revenue losses, in some cases little data are available and assumptions are made. These broad challenges would need to be considered when assessing how to approach the different options for further incorporating tax expenditures into federal budgeting processes.

Tax expenditures could be presented, for informational purposes, in the congressional budget resolution alongside other spending by budget function. A similar presentation could be included in the President’s Budget. Currently, tax expenditure estimates are presented in congressional budget documents and the President’s Budget separate from other types of spending. Moreover, they are not included within, or shown alongside, summaries of spending levels by functional category; rather, they are an undifferentiated component of total federal revenues, which obscures their size.

OMB previously presented tax expenditure revenue loss totals alongside outlays and credit activity for each budget function in the federal budget from fiscal year 1998 through fiscal year 2002, in response to one of our prior recommendations. However, it discontinued the practice in fiscal year 2003. In 2005, when we recommended that OMB resume presenting tax expenditures in the budget together with related spending programs, OMB told us that the current presentation of tax expenditure information—that is, presenting tax expenditures separately from other spending in the budget—was sufficient for providing the public and policymakers with what is useful to know about these provisions of the tax code. In our roundtable, experts noted that tax expenditure estimates by functional category were already included in budget documents, but also acknowledged that having the information in different parts of budget documents does not facilitate a side-by-side comparison. As we have previously reported, presenting tax expenditure estimates alongside discretionary and mandatory spending levels could increase transparency and better communicate to the public the levels of spending being allocated to national priorities.

Design Consideration

What methodology would Treasury and JCT use to estimate aggregated tax expenditures by budget function? Tax expenditure estimates represent the revenue losses associated with particular tax provisions, assuming the rest of the tax code and taxpayer behavior remain unchanged. If all tax expenditures within a budget function were removed at once, there would be interactions among the tax expenditures that would change the estimates. As a result, aggregating current tax expenditure estimates for a budget function would likely result in an imprecise estimate. However, Treasury and JCT officials told us that it was methodologically feasible to prepare aggregated revenue loss estimates representing those tax expenditures related to a specific budget function that would account for these interactions.

This option would institute a systematic approach to evaluating tax expenditures on an ongoing basis. Evaluations are studies that use research methods to address specific questions about program performance. In particular, evaluations can be designed to isolate the causal impacts of programs from other external economic or environmental conditions to assess a program’s effectiveness. Treasury does not regularly conduct evaluations of tax expenditures; rather, it conducts some evaluations on an ad hoc basis. Other researchers and organizations may also conduct evaluations of tax expenditures on an ad hoc basis. OMB has previously encouraged agencies to strengthen their program evaluations and expand their use of evidence and evaluation in budget, management and policy decisions to improve government effectiveness.

In 2005, we reported that the results of tax expenditure evaluations could help identify how well tax expenditures are working, both to identify ways to better manage specific tax expenditures and to decide how best to ensure prudent stewardship of taxpayers’ resources. As previously discussed, we recommended that OMB develop and implement a framework for conducting performance reviews of tax expenditures, but OMB has not reported on progress made on this recommendation since the President’s fiscal year 2012 budget. Moreover, since fiscal year 2011, the President’s budget has recognized that a comprehensive evaluation framework that examines incentives, direct results, and spillover effects would benefit the budgetary process by informing decisions on tax expenditure policy. Finally, this option may improve the information available to policymakers on the effectiveness of specific tax expenditures, which policymakers could then use in deciding how to best allocate resources to achieve national priorities. Tax expenditure evaluations could also complement ongoing GPRAMA-related performance measurement and reporting by measuring results that are too difficult or expensive to assess annually, explaining the reasons why performance goals were not met, or assessing whether one approach is more effective than another.

Design Considerations

Which tax expenditures would be evaluated and how frequently?

We have previously identified options for selecting tax expenditures for evaluation, including: (1) selecting on a judgmental basis, (2) selecting based on established criteria, and (3) evaluating an existing temporary tax expenditure before it is extended. Some state and foreign governments conduct tax expenditure evaluations grouped by policy focus or industry, or focus evaluations on tax expenditures with the largest revenue losses. For example, Germany focuses on its largest tax expenditures, with one budget-related document reporting that 27 of 102 tax expenditures—accounting for 75 percent of the value of all tax expenditures—were evaluated between 2011 and 2014. Meanwhile, the Netherlands established a 5-year schedule to review all tax expenditures and makes the goals and standards of the reviews publicly available.

Who would be responsible for conducting the evaluations?

Executive branch agencies could conduct these evaluations within the GPRAMA framework. We have previously recommended that OMB develop and implement a framework for conducting performance reviews of tax expenditures, though OMB has not reported on progress made on this recommendation since the President’s fiscal year 2012 budget, as previously mentioned. Experts also suggested that Treasury would be well equipped to analyze available taxpayer data related to specific tax expenditures. However, they also noted the potential for political influence in having any executive branch agency conduct the evaluations, and that hiring nongovernmental organizations to conduct these evaluations could be an alternative to executive branch reviews. One expert suggested that a tax expenditure commission with appointees from a balance of political parties could identify which of these organizations would conduct each review.

How might policymakers address data challenges? Agencies may not have access to confidential taxpayer data that they might need to conduct evaluations, and existing IRS data may not be sufficient for evaluating the efficiency, equity, and other effects of specific tax expenditures. For these challenges with lack of access to data, Congress has allowed some exceptions to laws limiting the disclosure of taxpayer information to third parties. For the challenge of lack of tax expenditure data, any party conducting an evaluation could, to some extent, use data from other agencies or other sources, such as public records, state agency records, and surveys, as previously discussed. IRS could also be directed to collect more data that could be used to evaluate a given tax expenditure, although such an effort could increase taxpayer burden. Policymakers could also weigh the availability of data on specific tax expenditures when deciding which tax expenditures should or should not be evaluated.

OMB could conduct reviews of portfolios of programs and other policy instruments—including tax expenditures—used to help pursue similar objectives. Currently, OMB generally reviews spending by agency rather than by policy area. We have previously reported that while the evaluation of spending programs in isolation may be revealing, it is often critical to understand how federal spending programs fit within a broader portfolio of tools and strategies—such as regulations, direct loans, and tax expenditures—to advance federal missions and achieve federal performance goals.

Likewise, such an analysis could help Congress and executive agencies identify whether a program complements and supports other related programs, whether it is duplicative or redundant, or whether it actually works at cross-purposes to other initiatives. For example, we previously reported that 20 federal government entities administered 160 programs, tax expenditures, and other tools that supported homeownership and rental housing in fiscal year 2010. We have also previously reported that coordinated reviews of tax expenditures with related spending programs could help policymakers reduce overlap and inconsistencies and direct scarce resources to the most effective or least costly methods to deliver federal support. Experts identified federal aid for higher education as another example of an area for which portfolio review could be valuable, as there are multiple federal grants, loans, and tax expenditures that serve this policy area.

Design Considerations

How would policy areas be selected for review? One expert noted that the selection of policy areas for review could be accomplished in Congress, either by the leadership in consultation with the President or by a budget committee as a part of the congressional budget process. Alternatively, GPRAMA could serve as the framework for selecting areas for review, specifically through CAP goals—the long- term, outcome-oriented crosscutting priority goals for the federal government. In September 2015, OMB staff told us that OMB had determined that there were no tax expenditures that were critical to support achievement of current CAP goals. However, as new CAP goals are established, tax expenditures may support their achievement. Further, we have previously reported that OMB and agencies are required to consult with Congress when establishing or adjusting CAP goals, which could provide Congress with opportunities to encourage further incorporation of tax expenditures into the goals, if desired.

How would the federal resources that contribute to a policy area be identified? As we have reported previously, creating a comprehensive list of federal programs along with related funding information is critical for identifying potential duplication, overlap, or fragmentation among federal programs or activities. GPRAMA requires OMB to publish a list of all federal programs on a central government-wide website. In October 2014, we reported that although OMB and agencies have taken some initial steps to develop program inventories with related budget and performance information, the ensuing result has not produced a useful tool for decision making. We made various recommendations to OMB to better present a more coherent picture of all federal programs and ensure that the information agencies provide in their inventories is useful to federal decision makers. For example, one of our recommendations was that OMB, in coordination with Treasury, develop a tax expenditure inventory that identifies each tax expenditure and describes its definition, purpose, and related performance and budget information; as of November 2015, no action had been taken on that recommendation. Such information could help agencies identify the contributions of tax expenditures to achieving national priorities.

Policymakers could help ensure greater coordination between the tax- writing and authorizing committees by having authorizing committees consider new or modified tax expenditure legislation for which they have program-related expertise. When proposed legislation is introduced in the House or Senate, it is generally referred to the committee with subject- matter expertise—thus, in the case of tax expenditures, tax-writing committees are referred proposed tax legislation that can span national priorities across the government. Authorizing committees, on the other hand, are referred proposed legislation for policy areas within their jurisdiction, but generally do not provide direct and formal input on legislation of related tax provisions in those policy areas.

By being involved in developing or modifying tax expenditure legislation, authorizing committees would have a broader picture of federal resources being allocated to national priorities. This may further help policymakers identify potential duplication between spending programs and tax expenditures, and may allow for greater comparison of how well specific policy tools help achieve a national priority. While bringing other committees into the process of reviewing tax expenditures could be institutionally cumbersome, having tax-writing and authorizing committees review tax legislation may still be appropriate when a provision has both programmatic purposes, like stimulating an activity, and tax policy purposes, like taking into account taxpayers’ ability to pay taxes.

Design Consideration

What path through committees would new tax legislation take?

Proponents of this option suggested various ways that both tax-writing and authorizing committees could provide input when considering proposed tax legislation. For example, some proponents suggested that tax-writing committees could continue to draft new tax legislation, but that authorizing committees would then need to approve the legislation before it goes to the full House or Senate for a vote—a process similar to the sequential referral. Under this option, policymakers would also need to consider how to account for tax expenditures serving varied purposes that fall within the jurisdiction of multiple committees.

Congress could authorize the Senate and House Budget Committees to include tax expenditures with other spending, both in total and by functional category, in budget resolution levels. Currently, the budget committees—via the budget resolution—set forth revenue and spending targets, including spending targets for each major functional category of the budget. Tax-writing committees then decide how to achieve revenue targets through, if needed, changes to overall tax rates or to specific tax expenditures. Meanwhile, appropriations and authorizing committees decide how to achieve spending targets for discretionary and mandatory spending, respectively. Depending on how it was designed, this option would either result in the budget committees setting targets for tax expenditure levels, or it would give authorizing (and potentially appropriating) committees greater or full control over determining the appropriate levels of spending for tax expenditures and other programs within a specific budget function.

Broadly speaking, some experts said that options that further integrate tax expenditures into congressional budgetary controls, such as the budget resolution, could result in the greatest change in how Congress approaches decisions on federal investments. Depending on how policymakers designed this option, it could potentially allow for this movement of federal resources across policy instruments. Moreover, some experts noted it was important for policymakers to have increased flexibility to budget across policy instruments—moving resources toward the most efficient and effective means of making progress toward a national priority.

Design Considerations

How would tax expenditure estimates be allocated to committee(s)? From our expert interviews and roundtable discussion, and within the literature we reviewed, experts identified various ways to further integrate tax expenditures into the budget resolution, each of which would result in a different shift in committee powers. For example, tax expenditures could be (1) allocated to the tax-writing committees; (2) allocated to, or shared between, both the tax-writing and relevant authorizing (and potentially appropriating) committees; or (3) allocated to the relevant authorizing (and potentially appropriating) committee to determine how to achieve those spending levels across multiple policy instruments. The first design alternative would continue to leverage the expertise of tax- writing committees in deciding tax policy. While the third design alternative would likely be complex to design and implement, it would potentially allow for the movement of federal resources across policy instruments. The second design alternative may help achieve both those benefits, but would also be complex to design and implement.

How might this change affect committee powers? This option could result in a substantial change in congressional committee jurisdictional powers, depending on how it was designed. The budget committees, and potentially authorizing and appropriations committees, would have greater input into tax policy decisions than previously, while tax-writing committees would have less input. One expert noted that dispersing tax expenditure decisions across multiple committees could impede any opportunity for fundamental tax reform, since the powers to make such changes would be distributed among more congressional actors. Whether or not this change in committee powers is an optimal outcome is a policy decision.

Could policymakers overcome tax expenditure measurement challenges? Policymakers would need to overcome the challenges of treating tax expenditures on the same footing as spending programs—particularly with respect to budget controls that are enforced. Specifically, some tax expenditure estimates are only loosely linked to actual tax filing data. Thus, any prior-year levels of spending for these tax expenditures are only estimates. In contrast, spending programs are measured in obligations and outlays, which are generally measured by the specific amounts of cash committed and disbursed by the government, respectively. However, this measurement challenge is not unique to tax expenditures. For example, experts noted that credit programs are also difficult to measure, but policymakers have made progress in measuring the costs of these types of programs through increased scrutiny and requirements for agencies.

Policymakers could require that all, or some subset of, tax expenditures expire after a finite period. This option would result in Congress periodically considering whether to allow tax expenditures to expire or to extend them, similar to the subset of tax expenditures that currently expire unless extended. Most other tax expenditures are enacted permanently and continue without change unless amended. Under Pay- As-You-Go (PAYGO) rules, this option would result in the tax-writing committees needing to find revenues to offset the cost of extending expiring tax expenditures. However, Congress could incorporate the cost of extending expiring tax expenditures in its baseline revenue estimates, thus negating the need to find offsetting revenues, or it could waive the PAYGO rules on a case-by-case basis. This option could result in greater oversight of tax expenditures, as policymakers would be required to explicitly decide whether or not to extend more or all tax expenditures.

Design Considerations

Which tax expenditures should expire, when, and in what way?

Congress could develop a general rule establishing which tax expenditures should expire and how often. It could also consider the added legislative workload imposed on the tax-writing committees by such a policy when deciding when tax expenditures might expire, and which ones would expire. We have previously reported that frequent changes in the tax code, such as from extended or expired tax provisions, can create uncertainty and contribute to compliance burden by making tax planning more difficult. Policymakers could consider if policies should be developed to mitigate this effect. For example, grandfathering could be provided for assets purchased under tax-preferred regimes. Policymakers could also examine how other countries that require tax expenditures to periodically expire have designed these policies to minimize this burden.

Could or should the option be designed to be revenue neutral?

All else equal, if a tax expenditure expires, the result would be additional revenue that the federal government would collect. Policymakers could consider whether to design this option in a way that would automatically lower tax revenues to achieve revenue neutrality.

Conclusions

In recent years, revenue losses from tax expenditures have reached levels similar to discretionary spending; approximately $1.23 trillion in revenue was forgone for fiscal year 2015. Even as discretionary spending has decreased, in real terms, since 2010, the amount of revenue forgone via tax expenditures has increased. Yet tax expenditures do not receive the same level of scrutiny within federal budget processes as discretionary spending. Moreover, the executive branch has made little progress toward increasing transparency of the budgetary effects of tax expenditures—compared to related spending—or toward implementing a framework to gauge their performance, as we have recommended previously. We continue to believe in the merit of those recommendations.

GPRAMA provides an existing framework for the executive branch to exercise greater oversight over tax expenditures and could help facilitate further incorporating tax expenditures into performance and budget discussions. In implementing GPRAMA, OMB has directed agencies to take tax expenditures into account when identifying programs and activities that contribute to their goals. However, despite this guidance, agencies have identified few tax expenditures that contribute to such goals. We have found that a lack of clarity about the roles of different agencies in conducting reviews of tax expenditures impedes their ability to identify tax expenditures that contribute to agency goals. OMB—given its government-wide purview—and Treasury—given its familiarity with administering the tax code—are well positioned to assist agencies in identifying tax expenditures that relate to their goals. Without additional OMB and Treasury assistance, agencies may continue to have difficulty identifying whether or which tax expenditures are relevant to their goals, and may be limited in their understanding of how the range of federal investments and policy tools contribute to agency goals.

More broadly, we identified various other options to further integrate tax expenditures into both the executive and congressional budgeting processes based on our review of literature and our past work, and our interviews and roundtable discussion with experts. If implemented, these options could increase transparency on how the federal government allocates resources, provide additional means for policymakers to review tax expenditures’ effectiveness, and create additional controls over spending through the tax code. However, the options come with a range of challenges and tradeoffs that policymakers would need to consider.

Recommendation for Executive Action

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

Agency Comments

We provided a draft of this report for review and comment to the Secretaries of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, Labor, State, Transportation, the Treasury, and Veterans Affairs; the Attorney General of the United States; the Directors of the Office of Management and Budget, and the National Science Foundation; the Administrators of the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, Small Business Administration and the U.S. Agency for International Development; the Acting Director of the Office of Personnel Management; the Acting Commissioner of the Social Security Administration; and the Chairman of the Nuclear Regulatory Commission.

OMB staff spoke with us about their comments on our report and generally agreed with the recommendation and further noted that implementing it could be beneficial. However, they also said it is not an effort they are currently pursuing due to competing priorities, as well as capacity and resource constraints. They also provided technical comments, which we incorporated as appropriate.

The following agencies provided technical comments that were incorporated into the draft as appropriate: The Departments of Energy, Health and Human Services, Housing and Urban Development, the Interior, and Labor.

The following agencies had no comments on the draft report: The Departments of Agriculture, Commerce, Defense, Education, Homeland Security, Justice, State, Transportation, the Treasury, and Veterans Affairs; the Environmental Protection Agency; the General Services Administration; the National Aeronautics and Space Administration; the National Science Foundation; the Nuclear Regulatory Commission; the Office of Personnel Management; the Small Business Administration; the Social Security Administration; and the U.S. Agency for International Development.

We are sending copies of this report to the Director of OMB, Secretary of the Treasury, and the heads of the other agencies we reviewed, as well as appropriate congressional committees. In addition, this report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-6806 or krauseh@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in the appendix.

Appendix I: GAO Contact and Staff Acknowledgments

GAO Contact

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

Staff Acknowledgments

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