Tax Reform, Part 2: Tax Expenditures

I was perusing the most recent Joint Committee on Taxation report on Tax Expenditures. These are special tax breaks in the Internal Revenue Code that represent a departure from the normal rules in calculating a person’s income tax liability. Conceptually, these special breaks represent a subsidy paid by the government with respect to activities which the government presumably wants to encourage.  Set forth below is a list of the largest tax expenditures - those that exceed $20 billion per year.  The numbers shown are for 2012, in billions of dollars::

Exclusion of Employer-Provided Health Benefits	117.3
Retirement Plans – Exclusion/Deduction of contributions and deferral of gains	111.2
Reduced Tax Rate on Dividends and Long-term capital gains	108.4
Mortgage Interest deduction	68.5
Exclusion of Medicare Benefits	64.0
Earned Income Credit	59.0
Child Tax Credit	56.8
Deduction of State and Local Taxes (other than real property taxes)	43.5
Deduction for Charitable Contributions Exclusion of Capital Gains at Death Deferral of Income Earned by Foreign Affiliates Exclusion of Interest on State and Municipal Bonds Exclusion of Untaxed Portion of Social Security Benefits	38.1 37.8 36.8 32.0 31.5
Accelerated Depreciation on Machinery and Equipment	31.4
Exclusion of Investment Income on Life Insurance Policies	29.2
Exclusion of Cafeteria Plan Benefits Real Property Tax deduction	26.8 24.5
Exclusion of Capital Gains on Residences	22.3
Tuition Tax Credits	20.3

These items alone total to nearly $960 billion, out of an estimated total tax expenditures of $987 billion.  Just a couple of notes - I have combined a few items from the JCT report for simplicity sake, such as combining several line items relating to retirement plans, and addition together all the charitable deductions (the report separates out deductions for contributions to universities and hospitals).

Note that there are a number of tax benefits that the JCT does not consider to be "tax expenditures."  The tax exemption granted to organizations under subchapter F of the Code - universities, hospitals and other charities - is not considered to be a tax expenditure. This report estimates the benefit to Northeastern University for one year (2011) of its exemption from federal income tax at $33 million.  This means that Northeastern, a supposedly non-profit educational institution, in fact made a profit of about $100 million in 2011. With a student body (undergraduate and graduate combined) of a little less than 20,000, that amounts to about $5,000 profit per enrolled student. Northeastern is a midsize university with an endowment size ranked 134th in the nation.  Is there any doubt, then, how large the benefit of the tax exemption is to these kinds of organizations?

The JCT also does not consider the benefits of using a pass-through entity to be a tax expenditure.  More on that later.

There is also a long list of items in the report for which the benefit cannot be quantified.  More on that later, too.

Anyway, take a look at this list.  And when you hear talk of "base broadening," remember that these are the items where reform could operate to "broaden the base." And listen to the ones they are actually talking about.