How Benchmark Tax System Specifications Affect CBO Tax Expenditure Estimates
The Congressional Budget Act of 1974 (the Budget Act) defines tax expenditures as “the loss of income attributable to provisions of federal tax laws which allow an exclusion, exemption or special deduction from gross income or which provide a special credit, a preferential tax rate or deferral of tax payable. Tax expenditures therefore result from provisions (exclusions, deductions, tax credits and preferential rates) of the federal tax system which grant special tax treatment to certain types of income, activities or groups. In turn, these provisions mean that government revenues are lower than they would be if these provisions did not exist.
Tax expenditures have a significant effect on the federal budget. Based on estimates prepared by staff of the Joint Commission on Taxation (JCT), the Congressional Budget Office estimates that the value of all tax expenditures in personal and corporate income tax systems is amounted to $ 1.6 trillion, or 7.8% of gross domestic product. , in fiscal year 2019. This amount equaled nearly half of all federal revenue, exceeded all discretionary spending, and totaled about 60% of all mandatory spending in the federal budget, which includes Social Security spending and health insurance.
To identify and measure tax expenditures, the normal tax structure in which these provisions represent special treatment must first be defined. This normal tax structure is known as the benchmark tax regime-the underlying framework of tax laws and administrative practices in which tax expenditures are analyzed. Thus, a benchmark tax system reflects a particular conceptual basis for taxation as well as other characteristics necessary to implement and administer the tax code.
This report describes how the specifications of the benchmark tax system used by the CBO affect the agency’s tax expenditure estimates. Before the entry into force of the finance law, the Treasury and the JCT produced estimates of tax expenditures. Although the budget law subsequently required the CBO to report on tax expenditures, it did not establish a specific framework to identify or measure them. Consequently, there is no single and consistent definition of the benchmark tax system or its characteristics that is universally used when analyzing tax expenditures. The specifications of such a system can therefore vary, leading analysts to disagree on the appropriate specifications for the benchmark tax system and the resulting tax expenditure estimates.