Trillion Dollar Secret

By Kate Tromble

It’s infrastructure season. President Biden has proposed an American Jobs Plan that, following on the heels of the American Rescue Plan, could help the country rebuild roads, schools, and other critical and civic infrastructure. The success of this plan lies, in part, in identifying a way to pay for it. One mechanism that has been suggested is raising the corporate tax rate, the highest marginal tax rate and the tax on investment income, setting off a debate about whether such an increase could cover the cost of the plan and what impact it would have on businesses. With trillions on the line, it turns out we know very little about the efficacy of our tax choices.

The sad truth, according to a 2018 report, is that each year Congress “spends” $1.5 trillion on tax breaks, tax cuts, and tax reductions that are never evaluated and are shielded from oversight. Many fail to achieve their stated goals, and many unfairly benefit wealthier people.

Compare this to the federal programs we’re all familiar with, like K-12 education, child care, rental assistance, or prescription drug coverage. All are designed to improve peoples’ lives. So these programs get evaluated to see how well they’re working, and they’re subject to annual oversight when Congress holds hearings and votes on whether and how much to fund them.

But not tax expenditures.

Tax expenditures are spending-like subsidies and special preferences (tax breaks if you will) given to individuals or corporations. They cost taxpayers roughly as much as the domestic discretionary programs we named above, but they’re treated with soft gloves. They’re not studied. They’re not evaluated. Congress holds no hearings about them as they make annual spending decisions.

The result? Some expenditures get automatic increases over time with no sense of whether they work. For example, policymakers don’t know if increasing the relative benefit to owner-occupied housing, which occurs automatically as people buy more expensive housing, increases the rate of homeownership. Some well-meaning deductions, like for mortgage interest, aim to increase home ownership but wind up skewing benefits to wealthier people who could already afford to buy multiple homes. Worst of all, some tax expenditures like incentives for saving for retirement, sound good, but research shows they are inefficient and wind up being a tax shelter for the wealthy.

The Biden Administration and the 117th Congress can change course. A critical first step is to actually evaluate tax expenditures. That requires expanding the capacity of federal government agencies to undertake evaluations. Fortunately, this idea was recently endorsed by almost 100 bipartisan leaders and organizations from across the country.

That’s why we believe the American Jobs Act should include a modest sum, $2 million plus one or two personnel, for the Treasury Department’s Office of Tax Analysis (OTA) to evaluate existing and proposed tax expenditures.

While OTA is best suited to conduct evaluations, the White House Office of Management and Budget (OMB) is better situated to oversee the process and enhance cross-agency collaboration. Congress could help by establishing criteria to consider in selecting expenditures to evaluate.

Yet, new money should come with important strings. Congress should require that each evaluation be made public in a user friendly format. And lawmakers should require OTA to submit an annual report that shares the results of evaluations and how they inform the president’s annual budget. That way evaluations are used rather than piling up on a dusty shelf.

If the new Administration and Congress are serious about getting Americans back to work and the economy back on track in a fiscally responsible way, they will have to get serious about studying how well all dollars are spent, including tax expenditures. By investing a small amount in evaluation now, we will learn which big expenditures work to increase revenue and accelerate economic mobility. And, just as importantly, which do not.

Kate Tromble is Vice President for Federal Policy at Results for America.