“A tax expenditure offers both the advantages and disadvantages of having something really removed from effective public oversight,” said Rep. Lloyd Doggett (D-TX), the keynote speaker at a Center for American Progress event last Tuesday. The event focused on tax expenditures—which are government spending programs implemented through the tax code—and the importance of scrutinizing them. Michael Ettlinger, Vice President for Economic Policy at CAP, moderated a panel of experts on the topic that included Kate Gordon, Vice President for Energy Policy at CAP; Matt Rogers, senior advisor at the U.S. Department of Energy; and Eric Toder, fellow at the Urban Institute and former deputy assistant secretary for tax analysis at the Department of Treasury.
Tax expenditures—tax subsidies for companies and individuals that are often enacted as substitutes for direct government spending—comprise nearly 25 percent of overall government spending. They make up more than $1 trillion of the fiscal year 2011 budget and are “as big or bigger than direct expenditures” explained Toder. These expenditures support various government policies including helping people save for retirement, promoting homeownership, and incentivizing companies to invest in green energy technologies and research. But tax expenditures, like direct spending, don’t always deliver maximum value to taxpayers.
Doggett urged Congress to take a closer look at these expenditures. Two wars, a mounting debt, the worst recession in decades, and an aging population make it imperative that government spend its funds efficiently and effectively.
Doggett said that we need accountability and analysis to create “a more effective legislative review process.” Currently, tax expenditures are hidden forms of government spending. Congress does not regularly review them, the executive and congressional budget process largely ignores them, and discussions about long-term fiscal planning often gloss over tax expenditure spending. Toder urged Congress to bring tax expenditures out into the open by drawing up a list of those that should be subject to budget analysis. He also suggested that something as simple as renaming them “IRS-administered spending programs” could help eliminate the political bias for using these programs.
The panelists went on to focus on energy tax expenditures as an example of the challenges tax expenditures pose. One of those challenges is their growing cost: Total energy tax expenditures increased from $3 billion to $10 billion over the last decade, according to Gordon. The shift toward energy tax expenditures may partly be because a request for direct spending requires more scrutiny and is subjected to the budget process, while a tax expenditure is much easier to win votes for since it is usually thought of as a tax cut.
Another challenge is that tax expenditures can be a mixed bag. For example, one-third of the energy provisions under the American Recovery and Reinvestment Act are tax provisions that have begun to reestablish U.S. leadership in clean technology, Rogers said. “The investment tax grant for renewable generation has brought life back to an industry that was in real difficulty,” he explained.
The problem is that while “you really can see an impact” of the effects of tax expenditures on clean energy development, according to Gordon, some of the same characteristics that make tax expenditures effective also make them dangerous. Though tax expenditures provide subsidies to help new industries grow, they also deliver billions to already profitable oil companies. The same lack of scrutiny that makes it easy to pass these tax expenditures also makes it challenging to remove those that deliver outdated or wasteful subsidies.
Further, energy tax expenditures alone cannot ensure a stable clean energy market. Gordon explained that there needs to be regulatory certainty in terms of market demand. This will create consistency in demand for clean energy and “spur industries that would not otherwise be able to be good market participants,” Gordon explained.
Overall, the panel consensus was that tax expenditures need the same scrutiny as direct spending. Those that work should be retained, while those that don’t should be eliminated or reformed. Our country’s fiscal condition makes this especially urgent.
Congressman Lloyd Doggett, House Budget Committee and Senior Member of the House Ways and Means Committee, U.S. Congress
Kate Gordon, Vice President for Energy Policy, Center for American Progress
Matt Rogers, Senior Advisor, U.S. Department of Energy
Eric Toder, Fellow, Urban Institute; former Deputy Assistant Secretary for Tax Analysis, Department of Treasury
Michael Ettlinger, Vice President for Economic Policy, Center for American Progress