Order Code RS21710
January 15, 2004
CRS Report for Congress
Received through the CRS Web
Tax Expenditures Compared with Outlays by
Budget Function: Fact Sheet
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division
The federal government carries out public policies through tax expenditures as well
as direct expenditures and regulations. In fact, in some categories of federal activity, tax
expenditures far exceed outlays. A tax expenditure is the estimated revenue loss from the
corporate or individual income tax associated with special tax treatment. The outlay
equivalent tax expenditure is the amount of budget outlays that would be required to
provide taxpayers with the same after-tax income that would be received through the tax
expenditure and hence is larger than the corresponding tax expenditure. As noted in the
federal budget, the outlay-equivalent measure allows the cost of a tax expenditure to be
compared with a direct federal outlay on a more even footing.
Table 1 presents, for FY2002, the Office of Management and Budget’s estimate of
the outlay equivalent of tax expenditures as a percentage of outlays by the functional
categories in the United States budget. This simple comparison reveals that tax
expenditures dominate outlays for education, training, employment, and social services;
energy; commerce and housing credit; and general government (percentages over 125%).
Outlays and tax expenditures share more equally in the areas of health; income security;
international affairs; and general science, space, and technology (percentages between
75% and 125%). Direct expenditures dominate in the areas of defense, Medicare, income
security, Social Security, veterans’ benefits and services, natural resources and
environment, transportation, community and regional development, interest, agriculture,
and the administration of justice (percentages under 75%). In the aggregate, the outlay
equivalent of tax expenditures approximates half of total outlays.
Typically, neither the Office of Management and Budget nor the Joint Committee
on Taxation sums functional or budget totals for tax expenditures because of possible
interacting behavioral effects if one or more provisions were eliminated. Sums of
categories were used here to enable a rough comparison between the outlay equivalent of
tax expenditures and outlays.
See also U.S. Congress, Senate, Committee on the Budget,
Tax Expenditures:
Compendium of Background Material on Individual Provisions, Prepared by the
Congressional Research Service, Committee Print S. Prt. 107-80, 107th Cong., 2nd sess.,
December 19, 2002, Washington, December 2002.
Congressional Research Service ˜
The Library of Congress
CRS-2
Table 1. Outlay Equivalent for Tax Expenditures, Outlays, and
Percentage Ratio, by Budget Function, FY2002
Outlay Equivalent
Outlays
Outlay Equivalent of
Budget Superfunction and
for Tax Expenditures
(in $
Tax Expenditures as a
Function
(in $ millions)
millions)
Percent of Outlays (%)
Defense
$2,540
$348,555
0.73%
Human resources
461,083
1,317,852
34.99
Education, training, employment,
100,900
70,544
143.03
and social services
Health
151,850
196,545
77.26
Medicare
0
230,855
0
Income security
179,983
312,511
57.59
Social security
24,980
456,413
5.47
Veterans’ benefits and services
3,370
50,984
6.61
Physical resources
325,250
104,405
307.39
Energy
4,320
483
894.41
Natural resources and environment
1,810
29,454
6.15
Commerce and housing credit
315,030
(385)
-81,825.97*
Transportation
3,040
61,862
4.91
Community and regional
1,050
12,991
8.08
development
Net interest
510
170,951
0.3
Other
124,300
117,018
106.22
International affairs
23,430
22,357
104.8
General science, space and
12,220
20,772
58.83
technology
Agriculture
1,840
22,188
8.29
Administration of justice
0
34,316
0
General government fiscal
86,810
17,385
499.34
assistance; General government
Undistributed offsetting receipts
NA
(47,806)
NA
Total
1,024,883
2,010,975
50.96
Source: U.S. Executive Office of the President,
Budget of the U.S. Government, Fiscal Year 2004, Washington: GPO,
2003. Outlay equivalent tax expenditures from
Analytical Perspectives, pp. 113-15; Outlays by superfunction and
function from
Historical Tables, p. 51. Percentages calculated by CRS.
* The negative percentage is not meaningful. Tax expenditures clearly dominate outlays for commerce and housing
credit. Outlays are negative in some years such as FY2002, and positive but small in other years.