The Congressional Budget Act of 1974 (Public Law 93–344) requires that a list of “tax expenditures’’ be included in the budget. Tax expenditures are defined in the law as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’’ These exceptions may be viewed as alternatives to other policy instruments, such as spending or regulatory programs.
Identification and measurement of tax expenditures depends crucially on the baseline tax system against which the actual tax
system is compared. The tax expenditure estimates presented in this document are patterned on a comprehensive income tax,
which defines income as the sum of consumption and the change in net wealth in a given period of time.
An important assumption underlying each tax expenditure estimate reported below is that other parts of the Tax Code remain unchanged. The estimates would be different if tax expenditures were changed simultaneously because of potential interactions among provisions. For that reason, this document does not present a grand total for the estimated tax expenditures.
Tax expenditures relating to the individual and corporate income taxes are estimated for fiscal years 2018–2028 using two
methods of accounting: current revenue effects and present value effects. The present value approach provides estimates of the
revenue effects for tax expenditures that generally involve deferrals of tax payments into the future.
TAX EXPENDITURES IN THE INCOME TAX
Tax Expenditure Estimates
All tax expenditure estimates and descriptions presented here are based upon current tax law enacted as of July 1, 2018 and
reflect the economic assumptions from the Mid-Session Review of the 2018 Budget. In some cases, expired or repealed provisions are listed if their revenue effects occur in fiscal year 2018 or later.
The total revenue effects for tax expenditures for fiscal years 2018–2028 are displayed according to the Budget’s functional
categories in Table 1. Descriptions of the specific tax expenditure provisions follow the discussion of general features of the tax
Two baseline concepts—the normal tax baseline and the reference tax law baseline—are used to identify and estimate tax
expenditures.1 For the most part, the two concepts coincide. However, items treated as tax expenditures under the normal tax
baseline, but not the reference tax law baseline, are indicated by the designation “normal tax method’’ in the tables. The revenue effects for these items are zero using the reference tax rules. The alternative baseline concepts are discussed in detail below.
Tables 2A and 2B report separately the respective portions of the total revenue effects that arise under the individual and
corporate income taxes. The location of the estimates under the individual and corporate headings does not imply that these
categories of filers benefit from the special tax provisions in proportion to the respective tax expenditure amounts shown. Rather, these breakdowns show the form of tax liability that the various provisions affect. The ultimate beneficiaries of corporate
tax expenditures could be shareholders, employees, customers, or other providers of capital, depending on economic forces.
Table 3 ranks the major tax expenditures by the size of their 2019–2028 revenue effect. The first column provides the number
of the provision in order to cross reference this table to Tables 1, 2A, and 2B, as well as to the descriptions below.
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