Let's Get Specific: Tax Expenditures

Continuing with our Let’s Get Specific series, which lays out specific plans and policies to help reduce our national debt, today we have released our recommendations for tax expenditures. Let’s take a look at what we propose…

Tax expenditures are deductions, credits, exemptions, exclusions, and other tax preferences that have undercut the effectiveness, efficiency, transparency, and fundamental fairness of the tax system. There are roughly 250 separate tax expenditures for individuals and corporations. They function much like spending programs but receive no annual budget oversight, moving year-to-year on autopilot while costing taxpayers hundreds of billions of dollars (in fact, over $1 trillion this year alone!).

We believe the tax expenditure budget must be brought under control, with correct oversight to broaden the tax base, simplify our tax code, and increase revenue collection. All of this could occur while also removing tax expenditures that distort incentives, thus altering aspects of our economy. We offer four specific steps to fix this massive budgetary hole:

  • Step One: Reform Large Tax Expenditures
  • Step Two: Consolidate and Simplify Overlapping Tax Expenditures
  • Step Three: Review and Eliminate Other Tax Expenditures
  • Step Four: Incorporate Tax Expenditures into the Budget Process

The most important of these is reforming the four largest tax expenditures:

  10-Year Savings ($billions)
Replace Employer Provided Health Insurance Exclusion with a
Gradually Reduce the Mortgage Interest Deduction $50
Eliminate the Deduction for State and Local Taxes $850
Put a Floor on the Charitable Deduction at 2% of Income $200

Source: Congressional Budget Office.


All these tax expenditures programs directly influence our economy, such as the mortgage interest deduction decreasing the cost of buying a house, thus increasing the demand and pricing of housing.

In the paper, CRFB argues that we should subject tax expenditures to annual scrutiny, like other areas of the budget. Lawmakers should also prevent the creation or expansion of any new or existing tax expenditures and should conduct a thorough review of them all. Enhancing the economic efficiency of the tax code and significantly reducing tax expenditures over the coming decade should be the goal of such a review process.

Reforming the largest tax expenditures (and the smaller ones too!) can greatly contribute toward getting the budget back on a sustainable path.

Click here to read the full report.