Will Special Tax Breaks Be More Closely Scrutinized Under the Obama Administration?

Buried in President Obama’s recently released budget blueprint were four little-noticed and perhaps unexciting sentences that could signal the coming of a major change in the way the executive branch thinks about, evaluates, and reports on tax expenditures:

The Administration will fundamentally reconfigure the Program Assessment Rating Tool. We will open up the insular performance measurement process to the public, the Congress and outside experts. The Administration will eliminate ideological performance goals and replace them with goals Americans care about and that are based on congressional intent and feedback from the people served by Government programs. Programs will not be measured in isolation, but assessed in the context of other programs that are serving the same population or meeting the same goals.

While the term “tax expenditure” isn’t explicitly included in this brief preview of things to come, a recently issued statement from Citizens for Tax Justice makes clear that meaningfully implementing the promises made above will have to involve shining a bright light on government programs hidden within the tax code.

For the uninitiated, the term “tax expenditure” essentially refers to tax laws that focus more on encouraging a specific activity or rewarding a particular group of people, rather than on trying to improve the efficiency, simplicity, or fairness of our tax system. Put another way, these provisions more closely resemble non-tax, spending-like programs than they do principled tax policy. Special tax breaks for capital gains income, research and development activities, mortgage interest payments, and retirement and health benefits all fit this billing. Altogether, there are more than 160 tax expenditures in our tax code (the precise number varies somewhat depending on the definition you use), and recent estimates peg their total size at upwards of $800 billion annually.

Even though most tax expenditures don’t constitute smart tax policy, it can at times be sensible to administer these programs as tax policies in order to piggyback on the IRS’ existing distribution structure. More often, however, these items are unwisely grafted to the tax code merely as a way to protect them from the annual scrutiny of the appropriations process, or to cash in on the widespread popularity of reducing taxes while simultaneously being able to re-direct government resources toward favored objectives.

Regardless of why these items ended up in the tax code, there’s a clear need to evaluate their effectiveness in achieving the goals for which they were enacted. Have the lower tax rates for capital gains and dividends income encouraged investment? Has the mortgage interest deduction resulted in a higher rate of home ownership? These kinds of questions deserve much more rigorous and visible consideration inside government than they have received in recent years.

Fortunately, if the President is sincere in his promise to assess programs “in the context of other programs that are serving the same population or meeting the same goals”, the OMB’s “Program Assessment Rating Tool” (PART) will have to be expanded and re-worked in a way that allows for the consideration of precisely these types of questions. How, for example, could one ever hope to evaluate any U.S. health care policy without considering it in the context of the $160 billion subsidy for health insurance given through the exclusion of employer provided health care? Likewise, what kind of housing policy analysis could ever ignore the $90 billion given to homeowners via the mortgage interest deduction? But as things stand today, this is exactly how the Program Assessment Rating Tool is used.

As the Citizens for Tax Justice statement pointed out, the push to include tax expenditures alongside other programs in the performance review process has received significant attention in the recent past. Unfortunately, however, up until this point its merits have not been enough to propel it past the political obstacles. In writing about the very specific language calling for tax expenditure performance reviews that was included in the Senate report accompanying the 1993 Government Performance and Results Act (GPRA), one observer pointed out:

Clinton’s Treasury Department, of which I was a part from 1998 to 2000, was unenthusiastic about performing these evaluations, reasoning that a comprehensive evaluation of tax expenditures would necessarily raise serious objections to measures enthusiastically advanced by the Administration … Although the menu of favorite tax expenditures changed when President Bush took office, the Office of Management and Budget has not published any new tax expenditure analyses

- Len Burman. “Is the Tax Expenditure Concept Still Relevant”. National Tax Journal. September 2003.

In order for real reform to occur, President Obama’s very visible push for greater government transparency will have to outweigh the coldly political calculations that have made for “politics as usual” up until this point.