PART VI. FEDERAL TAX EXPENDITURES

The individual and corporate income taxes contain numerous provisions granting favorable tax treatment for income expended on certain activities, or earned in certain ways. These favorable tax provisions take the form of exclusions, credits, deductions, preferential tax rates, or deferrals of tax liability. In all cases, the Government forgoes revenue for the purpose of the favorable tax treatment is to encourage taxpayers to undertake favored activities. Provisions of this type are known as tax expenditures.

The concept of tax expenditures is based on the premise that tax reductions enacted to favor certain activities are analogous to direct governmental expenditures paid through spending programs for those activities. Like direct expenditures, tax expenditures for an activity have budgetary effects; unless offset by tax increases or spending cuts, they increase the Federal deficit. And like direct expenditures, tax expenditures result in increased disposable income for beneficiaries of the expenditure. According to this reasoning, tax expenditures are analogous to entitlement expenditure programs, under which expenditures are made without other specific legislative authorization or appropriation. Like spending under entitlement programs, tax expenditures are available to any individual or corporation that meets the statutory and regulatory criteria established for eligibility for program participation. Under this view, tax expenditures are the equivalent of entitlement programs administered by the Internal Revenue Service.

The term "tax expenditures" is only applied to specific exemptions and other tax provisions which benefit specific activities without regard to theoretical principles governing the definition of income. A lengthy discussion of how tax provisions are classified as tax expenditures and the following tax expenditure estimates can be found in a pamphlet prepared by the staff of the Joint Committee on Taxation. (See: Joint Committee on Taxation, "Estimates of Federal Tax Expenditures for Fiscal Years 1994-1998," (JCS-6-93) April 22, 1993, herein cited as April 22, 1993, tax expenditure report). In preparing its measurement of tax expenditures, the Joint Committee staff follows the definition of tax expenditures that appears in the Congressional Budget Act of 1974: "*** those revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption or deduction from gross income, or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." (Congressional Budget and Impoundment Control Act of 1974, P.L. 93-344, section 3(a)(3.)

The legislative history of the Congressional Budget Act of 1974 indicates that tax expenditures are to be defined with reference to a normal income tax structure. According to the definition used by the staff of the Joint Committee on Taxation, the normal income