Top Ten Tax Expenditures: JCT releases its annual report

Earlier this week the Joint Committee on Taxation (JCT), the congressional group that provides cost estimates and tax expertise to Congress, issued its annual report on tax expenditures. Tax expenditures are defined under the Budget Act and are changes in tax liability that result from special tax provisions or tax rules that provide tax benefits to a particular group of taxpayers.

Top 10 Tax Expenditures, 2009-2013 (in billions)
Deduction of mortgage interest on owner-occupied homes  $573
Exclusion of employer contributions for health care, health insurance premiums  $568
Exclusion of pension contribution and earnings  $533
Reduced rates of tax on dividends and long-term capital gains  $419
Exclusion of Medicare benefits  $317
Earned income credit  $261
Deduction of state and local taxes  $250
Deduction for charitable contributions  $184
Child tax credit  $160
Exclusion of capital gains at death  $159

Tax expenditure provisions have become increasingly popular to lawmakers. They are designed to encourage or reward economic behavior or provide benefits to citizens, rather than funding spending programs through the annual appropriations process. For example, according to JCT, the February 2009 stimulus bills created 15 new tax expenditures designed to stimulate homeownership, subsidize health insurance coverage for the unemployed, and the “Making Work Pay” tax credit.

Critics argue that tax expenditures lack transparency and bypass the normal review channels. And their true costs are largely hidden in the federal budget, as they count as credit against individual or corporate income tax, meaning they do not show up as a cost to the federal treasury, but have the effect of lowering tax receipts. Using a tax expenditure provision instead of a spending program allows Congress to claim it is cutting taxes, while simultaneously providing a benefit to some group or taxpayers.

JCT and the Department of the Treasury (which publishes its estimates of the cost of these provisions in the Analytical Perspectives volume of the president’s budget) list and categorize the provisions differently. They are seldom reviewed by the congressional committee that oversees a particular policy area; for example, the mortgage interest deduction provision is reviewed by House Ways and Means and Senate Finance Committees (which oversee tax policy), rather than the authorizing committees that oversee housing policy. They are not part of the annual budget or appropriations process and are seldom re-examined as part of a comprehensive review.