It is widely said there is nothing certain in life, save for death and taxes. But in today’s world of politics and special tax treatment, maybe taxes should come with an asterisk, given the many carve-outs in today’s tax code.
A recently released report by the Minnesota Department of Revenue cataloged more than 300 so-called tax expenditures, which are statutory provisions that reduce the amount of tax revenue that would otherwise be generated. Such provisions are approved by federal and state lawmakers and come in a variety of forms, including exemptions, deductions, credits and lower tax rates. For states to balance their budgets, as required by law, they have to increase other taxes to generate the revenue not collected as a result of tax expenditures.
For fiscal year 2012, tax expenditures allowed consumers and businesses to avoid almost $14 billion in taxes. Minnesota’s 2012 tax collections are expected to come in around $34 billion, which means a little more than one dollar of tax is forgiven or otherwise taken off the table for every two and a half dollars of revenue collected by the state.
Roughly half of Minnesota’s tax exemptions are quite small—totaling less than $1 million in foregone taxes—for such mundane items as bovine tuberculosis testing (less than $50,000), small raffles ($200,000) and ski area equipment ($400,000). The bulk of tax expenditures go toward a comparatively small handful of items; more than 80 percent ($11.4 billion) are generated by just 27 tax code provisions (see table for top 10).
One might think that special tax treatment is a fairly recent phenomenon. But federal and state lawmakers have generated a relatively steady pace of such tax provisions over decades. Before 1933, there were just five. The federal government, as part of the New Deal, generated 38 in 1933 alone that still stand today. Things slowed considerably over the next couple of decades, but gained momentum over time (see Chart 1).
Some of the largest tax expenditures have long legislative roots. Major provisions passed in 1933 include the home mortgage interest deduction, write-offs for charitable contributions and employer contributions for medical care and insurance premiums. The 1960s were also a boon for tax write-offs; 45 percent of tax expenditures this fiscal year come from provisions passed that decade, including a slew of sales tax exemptions for things like clothing, drugs and many services, such as those provided by lawyers and accountants.
And while state governments struggle to balance budgets, tax expenditures are expected to continue accelerating by about 5 percent annually, topping $16 billion in FY2015, according to the Revenue Department (see Chart 2).