Tax Expenditures and the Federal Budget

Thomas L. Hungerford
Specialist in Public Finance

Americans often mention economic issues as the most important problem facing the United States. Recent economic issues mentioned include rising gasoline prices, rising unemployment, falling home prices, and rising mortgage interest rates. Relatively few, however, mention longterm federal budget concerns. But many policy makers and analysts rate long-term federal budgetary problems high on their list of economic problems facing the United States. President Obama created a bipartisan commission in February 2010 to develop solutions to the long-term federal fiscal problem.

Budget experts from think tanks and academia have developed proposals for dealing with longterm fiscal difficulties. Many argue that the federal budget deficits are unsustainable and threaten the future of the economy, but they differ on the causes of federal deficits. One group claims that Social Security, Medicare, and Medicaid are the major drivers of escalating deficits, and proposes that the budget process be reformed so these three programs are no longer on "autopilot." Another group proposes reducing projected deficits by reducing the growth of Medicare and health care spending, increasing Medicare premiums for higher income beneficiaries, eliminating or limiting many tax expenditures, reforming farm subsidy programs, and adhering to pay-as-you-go budget rules.

Among the options likely to be considered to deal with the long-term fiscal problem is reform of the federal tax system. The growth of the alternative minimum tax (AMT) and the expiration of the 2001 and 2003 tax cuts in 2010 will likely force some action on tax policy. Past efforts to reform the federal tax system have included policies to rein in the use and expense of tax expenditures, which account for a large proportion of the resources the federal government uses to achieve various national goals. By 2007, it is estimated that tax expenditures amounted to about $1 trillion and accounted for about a quarter of total expenditures. When combined with outlays for mandatory spending programs and net interest payments, almost three-quarters of total expenditures are for permanent programs that many claim are more or less on "autopilot." The proportion of total expenditures subject to annual review by the Appropriations Committees in the appropriations process has been declining over the past two decades.

Estimates of the revenue losses and distributional effects of tax expenditures depend on the parameters of the tax code. Both will change not only because of direct changes to the tax expenditures themselves, but also because of changes elsewhere in the tax code. Consequently, while many tax expenditures may be considered permanent, the revenue losses can vary year to year because of changing economic conditions and changes to the tax code. For example, the revenue loss and distributional impacts of many tax expenditures will change after 2010 when the individual income tax rates are scheduled to revert back to their pre-2001 levels.


Date of Report: May 26, 2010
Number of Pages: 17
Order Number: RL34622
Price: $29.95

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