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. 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 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. 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. 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. 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.