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Tax expenditures need regular reviews, says GAO

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More frequent reviews could better determine the effectiveness of tax expenditures and whether they support or hinder federal programs with similar goals, says the Government Accountability Office.

In a framework report (.pdf) released Jan. 8, GAO says tax expenditures should be reviewed either annually or at least reviewed before their enactment or extension.

Agencies whose missions relate to the goal of a tax expenditure should be responsible for its review, says the report. The IRS is not responsible for federal policies, such as housing or energy use, where expenditures contribute, GAO notes, adding that the Treasury Department should step in when there is no clearly related agency.

Expenditures, which reduce a taxpayer's tax liability, resulted in roughly $1 trillion in forgone revenue in fiscal 2011 and prompted Congress to request the framework, says the report.

The report recommends Congress use or establish performance measures for large tax expenditures to monitor success. Three questions for each would be: Do the benefits exceed the cost, is it fair or equitable, and are there ways to limit its impact on other tax revenue, such as the payroll tax?

The reviews could also examine whether expenditures duplicate or can coordinate with other federal efforts. For example, the report says federal support of domestic ethanol production came from both a tax credit and a renewable fuel standard, but GAO found the tax credit was unnecessary because the fuel standard was high enough to stimulate the fuel's production.

Another area Congress should look at, suggests GAO, is if a spending program or regulation could be more effective than an expenditure. The former typically narrow who is impacted by the policy, but that also means they typically give benefits to smaller portions of the market or have specific compliance costs.

The report says GAO has recommended greater scrutiny of tax expenditures since 1994, but "the executive branch has made little progress in developing a [review] framework."

For more:
- download the report, GAO-13-167SP (.pdf)

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