The Center for Budget and Policy Priorities (CBPP) recently released a report titled “Promoting State Budget Accountability Through Tax Expenditure Reporting.” The report addresses taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. expenditures at the state level and says that states need to issue regular reports that provide details on all tax expenditures, their costs, and their effectiveness. The report defines tax expenditures as
“reductions in tax liabilities that result from preferential provisions” in tax law. They include tax exemptions, credits, deductions, preferential rates, and abatements. Policymakers generally enact tax expenditures to accomplish a policy goal.
The report echoes what many economists all over the political spectrum agree on: that tax expenditures are really just spending in disguise and that their use shrinks the tax base and forces up tax rates. States are effectively subsidizing all the activities associated with their tax expenditures, like higher education, home ownership, or renewable energy. CBPP notes:
Every dollar the state forgoes in tax revenue is one less dollar it can spend on schools, law enforcement, or other priorities — or one more dollar it must raise through other taxes.
When tax expenditures are correctly viewed as spending, it becomes clear that states need to be accountable for how much they are spending through their tax codes. Tax expenditures need to be evaluated based on their effectiveness and in light of the principles of sound tax policy.
Tax expenditures represent a huge opportunity for tax reform, especially as states are struggling with revenue shortfalls. One way to increase revenue without raising taxes rates (or similarly, cut tax rates without sacrificing revenue) is to eliminate unjustifiable tax expenditures. Another benefit of eliminating tax expenditures is that it serves to dramatically simplify tax codes that are often un-navigable mazes of credits, deductions, and exemptions. We often write about unjustifiable tax expenditures that should be reformed or eliminated. Check out these posts on alternative fuels credits, film tax credits, education credits, and the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. .
While we may disagree with CBPP over which tax expenditures are justifiable and which are not, their report serves to highlight the fact that policy experts of all political stripes agree that current tax systems at the state and federal level are immensely complex and have serious transparency issues, due in large part to tax expenditures.
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