Ask the Expert: Sima Gandhi on Tax Expenditures

What are tax expenditures?

Tax expenditures are a form of government spending. I think the easiest way for me to explain to you what tax expenditures are is to give you an example. So pretend I'm an oil company, and the government wants to encourage me, an oil company, to go drill an oil well. It can do one of two things. It can say, "We're going to give you, oil company, a check for a hundred dollars every single time you drill an oil well." Or it can say, "You, oil company, we're going to let you pay a hundred dollars less in taxes every single time you drill an oil well." They sound different, but at the end of the day, these two options, a direct check or a tax expenditure, are economically equivalent. The oil company is a hundred dollars richer, and the U.S. treasury is out of pocket a hundred dollars, and your federal deficit is that much bigger. So why do we call this type of spending through the tax code a tax expenditure? Well, this term was invented in the 1970s, and it's what other parts of the government call it, so we've decided to stick with it. So tax expenditure, tax subsidy, tax break, whatever you want to call it, it's government spending.

What makes them different from other forms of government spending?

Tax expenditures, even though they're economically equivalent to other types of government spending, and they cost a lot ($1.2 trillion--that's almost enough to pay off this year's federal deficit) are not treated like other types of government spending. They're not part of an official budget process, they're not annually scrutinized, they are not as transparent as other types of government spending. That doesn't make sense. That's almost twenty-five percent of your taxpayer dollars that are being spent on things that don't always make sense. For example, highly profitable oil companies? They get $45 billion in tax expenditures over the next 10 years. That doesn't make sense.

What can we do to rein them in?

There are four things that we here at CAP believe that we need to do to get tax expenditure spending under control. First, we need to acknowledge that this is an important form of government spending and that we need to start treating it like government spending. Second, we need to start measuring and evaluating this type of government spending. It's $1.2 trillion! We should know when it works and when it doesn't work so we can reward programs that do work and cut spending when it doesn't work. Third, we need to start scrutinizing this regularly. Congressmen and lawmakers and policymakers need to start thinking about this as real dollars that's out of the U.S. treasury and evaluating it as part of their annual budget process. And finally, they need to be more transparent. You should know where taxpayer dollars are being spent.