Tax expenditure

A tax expenditure is a special exclusion, deduction, credit, deferral or preferential rate in the tax code that lowers the tax of those who qualify. The term was coined in the late 1960s by Treasury official Stanley Surrey, who argued that these provisions work like spending programs delivered through the tax system.

Large examples include the exclusion of employer-provided health insurance, the mortgage interest deduction, the charitable deduction, preferential rates on capital gains and retirement account benefits. Both the Treasury and the Joint Committee on Taxation publish annual estimates of their cost, which together run to well over a trillion dollars a year.

Supporters of particular tax expenditures say they encourage valuable activity, such as homeownership, savings and charity, and give relief to families. Critics argue that they complicate the code, mostly help higher-income taxpayers, distort choices and lose revenue that could allow lower rates. Tax reform efforts, such as the 1986 reform and proposals for a flat tax, usually aim to trim them in exchange for lower rates, but each has a constituency that defends it. Examples include the SALT deduction and the child tax credit.