The Internal Revenue Service does not have enough data to identify who claims a tax expenditure and how much they claim, for nearly half the dollar value of all tax expenditures, or $492 billion out of $1 trillion, according to a new report by the Government Accountability Office.
Tax expenditures include special exemptions and exclusions from taxation, deductions, credits, deferrals of tax liability, and preferential tax rates that are exceptions from a “normal” tax. They represent a substantial federal commitment. An estimated $1 trillion in revenue was forgone through tax expenditures in fiscal year 2011—an estimate produced by totaling the Treasury Department estimates for each of the 173 tax expenditures reported in that year. The GAO contends that many tax expenditures are equivalent to spending through the Tax Code. For example, some tax expenditure programs are intended, like some spending programs, to encourage economic development in disadvantaged areas, finance postsecondary education, and stimulate research and development.
The revenue the federal government forgoes from tax expenditures reduces funds available for other federal activities, requires higher tax rates to raise any given amount of revenue, or increases the budget deficit. The IRS is responsible for administering the tax laws, including those for tax expenditures. However, the IRS is not required to collect or evaluate data other than those which are required for administration of the Tax Code unless it is legislatively mandated to collect additional information.
Basic data is not available at the IRS for tax expenditures, according to the GAO report, because many of the expenditures do not have their own line item on a tax form. This includes $102 billion of tax expenditures that were not on tax forms, such as the exclusion of interest on life insurance savings, and $390 billion of tax expenditures that were on tax forms but did not have their own line items, such as the credit for holding clean renewable energy bonds which is aggregated with other credits on a single line item.
In four cases in which the Office of Management and Budget identified outlay programs and comparable tax expenditure programs that shared similar purposes, the related agencies produced performance measures and goals only for the outlay programs and not for the comparable tax expenditures. For example, the OMB identified the Alternative Technology Vehicle Credit as having a comparable purpose to the Department of Energy’s Vehicle Technologies outlay program, as both are intended to create more fuel efficient modes of transportation.
The DOE produced a performance measure and goal for the outlay program—petroleum consumption reduced by 570 million gallons per year by 2011—as required under the provisions of the Government Performance and Results Act of 1993 and the Government Performance and Results Act Modernization Act of 2010. However, the DOE did not produce measures and goals for the comparable tax expenditure as neither act requires the DOE or other federal agencies to do so.
While the IRS is responsible for administering the tax expenditures, it is required by law, unless otherwise directed by Congress, to collect only the data required for administration of the Tax Code. The GAO has recommended that the agencies responsible for tax expenditures be identified and the lack of credible performance data be addressed.
To assist with this, the GAO recently issued a guide (GAO-13-167SP) for evaluating the performance of tax expenditures. The GAO made no recommendations in the report. The IRS provided technical comments that were incorporated as appropriate, but no response letter from an IRS official was included in the report.