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Overlooking Tax Expenditures Affecting The Federal Budget



The GAO released a report today called Tax Expenditures: Opportunities Exist to Use Budgeting and Agency Performance Processes to Increase Oversight (GAO-16-622). The report examines the estimated $1.23 trillion annual cost of special tax deductions, exclusions, credits and preferential rates AND how there is basically no oversight of these costs relative to discretionary budget items. Apparently, OMB and federal agencies were to review tax expenditures (there are over 150 of them) to see how they help agency goals. So far, only 11 of 169 expenditures were addressed representing less than one-third of the total cost.

I have not yet read all of the 55 page report, but the exercise sounds somewhat futile because many expenditures are not likely to fit into any agency goals. For example, what federal agency supports not only ownership of a vacation home, but also having a mortgage on it? Does the Department of Education’s goals include making sure couples with up to about $180,000 of income can get a $10,000 scholarship (American Opportunity Tax Credit) for a child? Seems to be contrary to the underfunded Pell grant program designed to help those in need pay for tuition.

The GAO website includes a nice infographic reproduced here. Too bad it is not part of any effort to increase government finance literacy among the public. I think it would be easier to broaden the tax base if more people knew of the costs of some of these tax expenditures and the minority of taxpayers who benefit from many of the more costly ones. Helpful information would include how, for example, the annual $80 billion for the mortgage interest deduction might be used more widely to help more taxpayers. [Data shows that only one third of individuals itemize and that the mortgage interest deduction primarily helps higher income individuals buy a more expensive home. Also home ownership rates in the US are similar to UK and Canada that don’t have this deduction.]

You can read the GAO report here.

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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