Even if the phrase “tax expenditures” makes you run for a strong cup of joe or tempts you to click over to YouTube for some funny cat videos, read on. In today’s lackluster economy, tax expenditure reform has been in the headlines nationally, and it should be on your mind, too.
Governments use tax tools’ deductions, credits and exemptions’to advance public policy goals in areas like economic development, education and human services. These are called tax expenditures because the government effectively spends money ‘ by reducing or eliminating taxes ‘ to support targeted activities. For instance, the federal government supports college attendance through Pell grants but also through tax credits for education. DC has supported the building of grocery stores in impoverished areas by offering direct grants in some cases and with tax exemptions in others. Tax expenditures are government programs operated through the tax code.
If well planned, tax expenditures can be a great way to accomplish public policy goals. The District’s popular Earned Income Tax Credit, for example, helps poor working families thrive while boasting very low administrative costs.
However, one problem with tax expenditures in the District is that they don’t receive the same scrutiny that budgetary expenditures do, despite having the same effect on the city’s bottom line. This is a big deal, since DC has more than 100 tax expenditures that result in $2 billion in foregone revenue. What’s more, 23 current DC tax expenditures were enacted in the first half of last century’including one dating back to 1902.
Because there is no mechanism in DC to regularly review and evaluate tax expenditures (referred to as a “sunset” provision), it is likely that some are no longer advancing important public policy goals. In addition, many tax expenditures’like tax exemptions on retirement and college savings or mortgage interest deductions’are not well targeted and primarily benefit upper-income individuals, who would have saved for retirement, sent their kids to college, and bought a home regardless of the tax benefits. Other tax expenditures simply don’t work well but remain on the books nonetheless. For instance, the 2001 E-Conomy Act created a set of tax breaks for high-tech companies moving into the District. Since then, DC’s share of the region’s high tech jobs has actually declined. Without a regular review process, these types of inefficiencies usually go unseen.
As the District works to bolster revenues in a struggling economy, it should consider implementing a sunset clause to force a scheduled review of each tax expenditure’s costs, benefits, and relevance. This would likely expose millions in needlessly foregone revenue that could help mitigate some of the deep cuts to critical programs expected in the FY2012 budget. The District should follow the lead of many progressive states in setting a sunset date on all existing and new tax expenditures. Such an action would go far in reducing the inefficient use of precious District money.
